Mastering the ebb and flow of money in and out of your business is the difference between financial health and disaster.
Actually, 91% of SMBs may not pass the fifth year of operation due to cash flow challenges, making cash flow management a pinnacle of running your business.
How to avoid being part of the above grim statistics?
Read on to learn more about cash flow management to keep your money moving in the right direction and spot potential pitfalls before they become problems.
Let’s dive in!
What is Cash Flow Management?
Cash flow management involves tracking, analyzing, and optimizing the movement of cash in and out of a business.
It manages the timing and amount of cash inflows through sales, receivables, investments, etc., and cash outflows through expenses, payables, investments, etc.
Therefore, your business can have sufficient funds to meet its obligations and take advantage of new business opportunities.
📌 Cash Flow Management vs. Cash Management: What’s The Difference?
The terms cash flow management and cash management sound similar but have some distinct differences.
Cash flow management focuses on the overall movement and control of cash in and out of your business over time.
On the other hand, cash management refers to the day-to-day handling and control of your business's cash resources.
Thus, it includes activities related to collecting, disbursing, and safeguarding cash.
Why Does Cash Flow Management Matter?
Cash flow management is a fundamental aspect of financial management and financial stability that helps support long-term business growth and profitability.
In addition, it helps with:
💰 Liquidity and solvency
Proper cash flow management ensures you have enough cash to meet your short-term obligations, such as paying employees, suppliers, and creditors.
💰 Operational efficiency
Managing cash flows effectively allows you to optimize your working capital and invest surplus cash in growth opportunities.
💰 Strategic decision-making
Cash flow data provides valuable insights that help you make strategic decisions like pricing, budgeting, investments, and expansion plans.
💰 Profitability and growth
By managing cash flows effectively, you can reduce the costs associated with cash shortages, such as late fees, overdraft charges, and missed discounts.
💰 Risk mitigation
Seasonal fluctuations, unexpected expenses, or delayed customer payments are all potential cash flow-related risks that you can mitigate with proper cash flow management.
💰 Access to financing
If you’re in need of additional loans, cash flow is a key indicator that lenders and investors check to assess your financial health and ability to repay debts or generate returns.
What are The Elements of Cash Flow Management?
5 elements constitute the axis of cash flow management:
- Accounts Receivable Management — Refers to the ways in which you manage and collect customer payments to ensure timely cash inflow.
This includes activities such as setting credit terms, issuing invoices promptly, and following up on overdue accounts
- Accounts Payable Management — Helps with timing outgoing payments to suppliers and creditors to maintain cash flow without harming relationships.
- Cash Flow Forecasting — Involves predicting future cash inflows and outflows based on a thorough analysis of:
- Historical data,
- Current trends, and
- Anticipated revenue and expenses.
Thus, you can prepare for potential cash shortfalls or surpluses and make informed decisions about resource allocation, investment strategies, and operational planning.
- Expense Management — Helps identify and control operating expenses to limit cash outflows, such as renegotiating contracts or cutting unnecessary costs.
- Cash flow monitoring — Ensures that you regularly track your cash inflows and outflows to maintain liquidity.
💡 Did you know that with Puls Project, an all-in-one cash flow management tool, you can centralize your financial management and track balances and spending across different accounts and companies?
Tracking Money In and Money Out: The Impact of Payables and Receivables on Cash Dynamics
Understanding the dynamics between payables and receivables is crucial for maintaining financial stability and growth.
Payables, or the money your business owes to your suppliers and vendors, play a vital role in managing cash outflows.
Effectively negotiating payment terms, optimizing supplier relationships, and ensuring timely payments can help preserve cash reserves and maintain a healthy cash position.
Consequently, you can optimize your cash conversion cycle and seize new opportunities.
Receivables, on the other hand, represent the money your customers owe you. It is equally important in determining cash inflows.
Efficient invoicing, proactive credit management, and effective collection practices can significantly impact your company's cash flow.
For example, if you closely track invoices, send timely reminders, and establish clear payment terms, you can accelerate the collection.
Furthermore, you can reduce the risk of bad debts and maintain a steady stream of incoming cash.
💡 ProTip:
One way to effectively manage your APs and ARs is to automate certain processes, such as payments and invoicing, to free up valuable time and resources.
Puls Project enables future-dated draft payments to see how they will impact your business immediately.
6 Most Common Cash Flow Management Problems & The Ways to Fix Them
Despite being a crucial aspect of running a successful business, many companies struggle with various cash flow-related challenges.
Take a look at the most common cash flow management problems that businesses often face.
1. Delayed Payments
One of the primary cash flow issues you can encounter is the delayed collection of payments from customers.
Customers may take longer than expected to settle their invoices, resulting in a gap between when you need to pay for expenses and when you receive revenue.
As a result, this can create a strain on your company's liquidity and make it difficult to meet financial obligations.
✅ Solution:
Establish a clear credit policy and thoroughly assess your customers' financial credibility before granting credit.
This way, you can reduce the risk of delayed or missed payments, significantly affecting your company's cash flow.
If you still want to accept delinquent customers, consider introducing steep interest rates.
2. Overspending
Another common problem is overspending, where you allocate more resources than you can afford.
The reasons for this may vary, including poor budgeting, uncontrolled spending, or a lack of financial discipline.
Unfortunately, it can quickly deplete your company's cash reserves and create a negative cash flow cycle.
✅ Solution:
Perform regular audits to evaluate your expenses and check which ones you can reduce or eliminate.
Also, see all the service subscriptions to cancel the one you no longer need.
For example, with Puls Project’s Automated Expense Tracking, you only need to input your regular monthly expenses once, and they will automatically pop up the next month.
3. Inventory Management Challenges
Holding too much inventory can tie up valuable capital, while not having enough inventory can lead to lost sales and missed opportunities.
Thus, striking the right balance between inventory levels and cash flow is crucial for maintaining a healthy financial position.
✅ Solution:
Check the following 3 strategies to achieve the right balance between inventory levels and cash flow
1. Just-In-Time (JIT) Inventory — Keep inventory levels low and order stock only when you need it to minimize holding costs and free up cash.
2. Regular Inventory Reviews — Conduct regular assessments of inventory levels and turnover rates to identify slow-moving or obsolete stock and take steps to reduce these items through discounts or promotions.
3. Supplier Terms Negotiations — Work with suppliers to negotiate better payment terms or bulk purchase discounts.
4. Unexpected Expenses
In any type of business, it is normal that unexpected expenses, such as equipment breakdowns, legal fees, or regulatory compliance costs, can occur.
These unanticipated expenses can disrupt cash flow and strain your financial resources, making it challenging to maintain a stable cash flow.
✅ Solution:
A cash buffer can help you storm turbulent periods and close financial gaps until your business picks up again.
As a rule of thumb, you should aim to put aside 1-3 months’ operational expenses.
However, if you are a small business just starting out, it may be hard to come up with that amount.
Puls Project’s Loan functionality enables you not only to get up to €100,000 for
12 months within 48 hours, but also to tailor the loan to your needs.
Thus, you can select your desired loan amount and period and pay back only the amount you’ve actually used.
5. Seasonal Fluctuations
Seasonal variations in sales and revenue lead to cash flow imbalances.
While you may struggle to cover fixed costs and operational expenses during low-demand periods, high-demand seasons ask for investment in additional resources to meet increased customer needs.
✅ Solution:
Cash savings and buffers will also come in handy with seasonal fluctuations.
Besides traditional banks, you can also opt for non-banking options since they have quicker loan processing.
Puls Project issues loans from a credit fund registered with BaFin, meaning no complex forms, no banks or 3rd parties involved.
The process is straightforward and takes only 3 steps.
In addition, you can instantly increase your available credit by connecting another business account and witnessing a new positive balance.
Thus, by building credibility, you simultaneously boost your credit line, giving you peace of mind to access funds quickly.
6. Lack of Financial Planning and Forecasting
Failing to implement financial planning and forecasting makes you more susceptible to cash flow problems.
Without a clear understanding of your financial position, future cash in- and outflows,, and potential risks, it’s challenging to make informed decisions and manage your cash flow effectively.
✅ Solution:
Consider leveraging technology to automate financial operations and processes and avoid manual and error-prone calculations.
With Puls Project, you can view and manage all companies and accounts in one place, providing you with a unified view of better organization and planning.
This way, you can connect multiple bank accounts and see all of your transactions flow automatically to the centralized dashboard.
We sync transactions multiple times daily, ensuring you always have a real-time view.
If you want to explore how to improve cash flow management in more detail, hop on to our blog, How to Improve Cash Flow Management in 13 Ways?
2 Main Cash Flow Management Scenarios
Let’s get more practical and see 2 possible cash flow management scenarios.
Scenario A: Positive Cash Flow
Let’s imagine that a company has the following payment terms:
- Customer Payment Terms: 30-day payment terms for customers.
- Vendor Payment Terms: 60-day payment terms for suppliers.
- Cash Flow Management Practices:
- The company sells its products to customers who have 30 days to pay their invoices.
This means the company collects cash relatively quickly after a sale.
- The company has negotiated with suppliers to extend their payment terms to 60 days.
Doing so allows the company to keep cash in the business longer before making payments to suppliers.
Benefits of This Approach:
The company has 30 days after making sales to collect cash, and they delay paying suppliers for 60 days, giving them 30 days of additional cash flow from sales before paying their bills.
Scenario B: Negative Cash Flow
Let’s say that the same company from the example above still follows the same payment terms.
Due to market conditions or increased competition, the company experiences a decrease in sales.
Thus, they only generate $100,000 in sales revenue in a given month instead of their typical $200,000.
📉Cash Flow Challenges:
- Decrease in Sales
Due to market conditions or increased competition, the company experiences a decrease in sales. They only generate $100,000 in sales revenue in a given month instead of their typical $200,000
- Increased Operational Costs
The cost of materials has risen, leading to higher costs for goods sold. Let’s say their cost for materials now amounts to $150,000, which they need to pay in the following months.
Effects of Negative Cash Flow:
- Liquidity Problems
The company faces a cash shortfall of $50,000 in September.
Without sufficient cash reserves or financing options, they may struggle to cover operational costs and might need to take out loans or delay payments.
- Supplier Relationships
If the company is unable to meet its payment obligations on time, this could lead to strained relationships with suppliers, risking their credit terms and future supplies.
- Operational Disruptions
Negative cash flow can lead to difficulties in meeting payroll, purchasing necessary materials, and fulfilling orders, establishing a cycle of operational challenges.
To manage this negative cash flow, the company can leverage one of the strategies we’ve mentioned — from improving collections to negotiating payment terms.
Take Control of Your Cash Flow with Puls Project
Sound cash flow management practices will help you lay a strong foundation for your business’s future growth and sustainability.
Puls Project helps you continuously monitor your cash flow, access necessary funding, and identify and solve potential cash flow problems.
Thus, with Puls Project, you can:
🔥 Connect multiple bank accounts from over 4000 German banks and centralize all your operations in a single dashboard.
🔥 Categorize and label transactions and activities based on project, department, or purpose criteria for more effortless organization and monitoring.
🔥 Track and analyze profitability by label, category, counterparty, company, or account over any period.
🔥 Apply for up to €100,000 for 12 months and get an automatically calculated credit limit based on group level within 48 hours after connecting your account.
🔥 Monitor your cash flow actively, and if we detect a cash gap, we’ll notify you so you can make necessary adjustments.
Ready to see what else we offer?
Sign up for Puls Project today and make cash flow management simple.
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