Cash flow management is simply the practice of balancing how much income is coming in with the expenses that need to be paid. Businesses should not spend money they haven’t received, so projecting expenses and setting aside cash for future bills is important to the financial security of a the company.

Cash flow basics

Operating in the red is when there is negative cash flow. This simply means the amount of cash going out of a business is greater than the amount of cash coming into the business.

Operating in the black is when there is positive cash flow. In other words, the amount of cash coming into the company exceeds the amount leaving the company to pay for Cost of Goods Sold, overhead operating expenses, and debt payments. Having positive cash flow doesn’t just magically happen. A business has to work at managing their cash effectively to control the income and outgo.

Managing cash flow on a weekly basis gives the business owner the ability to run tighter control on the cash. Cash flow planning, also called income planning, is the process of working out how to get income up and constantly monitoring costs and reducing discretionary expenses

Cash flow projections and budgeting

Knowing when, and how much, income will be coming in and when, and how much, money will have to be spent is the first part of the budgeting process. Budgeting anticipates shortfalls and surpluses in cash income. Similarly, cash flow projections do the same thing.

Companies typically do their initial cash flow projections and budgeting based on the most recent 12 months of operation, and then they adjust the numbers based on anticipated changes in both income and expenses. What they often fail to do is budget for profits and setting aside cash for emergencies, business expansion, taxes, profits, and a retirement plan.

As the months roll by, a company should ideally update their cash flow projections on a regular basis so the numbers accurately reflect changes in income, expenses and profits. Most companies, when doing this cash flow analysis, find that their projections and budget change on a regular basis during the updating process.

Handling cash shortfalls

For many small businesses, staying on top of cash flow management is a difficult thing, especially with the number and amount of expenses faced each week. When there is a cash shortfall, companies have a number of options to get them through this rough spot until income arrives. The typical practice of applying for a loan or a line of credit just creates another bill that has to be paid with interest. Delaying payments to suppliers creates tension in vendor relationships. And while liquidating assets to raise cash can be effective in times of a severe cash flow shortfall, it takes time and is often too slow a remedy for accessing cash.

A better solution is to work at speeding up collections and setting aside surplus cash for handling these times of cash shortfalls.

Budgeting for and using cash surpluses

When a company budgets for building up a cash surplus as a financial cushion to cover cash shortfall emergencies, needed expansion, paying taxes, and retirement, then the business won’t find itself needing to go into debt by getting a loan or drawing on and LOC or using credit cards.

There is a major difference between just expecting a cash surplus to actually planning for and building a surplus; treating the surplus set asides much like any other “bill” that the company has to pay.

Consulting and software

Every size business has a wide range of resources available to them in dealing with cash flow management. Small and medium sized businesses may need financial management consulting, or coaching, to effectively manage their cash flow. A company like Money Management Solutionas, Inc. is a popular resource for the learner. The services we offer not only include financial management consulting and training, our cash flow management software, called Cash Flow Mojo, and our books and training tools are cost effective solutions to manage and track cash flow. We have the solution to business cash flow management problems…you just have to commit to spending 30 minutes a week working with our tools to reap the benefits and achieve your financial goals.