What is Cash Flow Management?
The primary requirement for establishing a successful business setup or a company is the amount of cash available for investing in the new venture. Once the business is established, cash flow management in the internal or external matters of the company is important. If you are a newbie in the business industry, this article has all the details of cash flow management.
Talk to one of our intelligent and clever professional bookkeepers to get your further queries about bookkeeping services in London. We will be sure to come up with the best possible solution for you.
What is Cash Flow Management?
In business, cash flow management is planning, tracking, and controlling the flow of cash in internal and external matters of business. Cash flow management helps in estimating the future cash demands of the company and ensures that enough funds are available for the smooth running of the business as planned. Cash flow management helps in maximising capital assets by investing extra money in other business ventures. It also helps to design future business strategies, including the forecast for cash flow and its analysis, reducing expenses, generating more revenue, and ensuring that the payments and transactions are made on time.
Types of Cash Flow
In a business setup, cash is handled in various ways. The three common types of cash flow are mentioned below
1- Cash Flow From Operations (CFO)
Cash flow from operations indicates that money is utilised in the production and sale of goods by the company. This is also known as operating cash flow (OCF) or net cash from operating activities. The CFO shows a clear picture of funds owned by a company to pay its bills or manage operational expenses. The operating cash flow is calculated by subtracting the cash received from operating expenses that were paid by the company.
2- Cash Flow From Investing (CFI)
The second type is cash flow from investing (CFI). This type tracks the amount of cash generated from an investment by the company or spent on various activities by the company. The investment activities include purchasing stocks, shares, or investments in the sale and purchase of securities. There can be a loss in investment, indicating negative cash flow wins for the company. This may be due to a huge amount invested with less revenue generated.
3- Cash Flow From Financing (CFF)
This type indicates the total cash flow used to fund the company’s operations and investments. The CFF is generally known as financing cash flow. The CFF handles financing activities such as transactions involving the amount of debt issued or equity and paying dividends to shareholders.
Managing Cash Flow
The effective management of cash flow in the company needs a balance between the incoming cash and outgoing cash in the company. Below are some key practices to maintain a balanced cash flow in the company.
1- Monitor and Track Cash Flow
Regular monitoring and tracking of cash flow in the company through analysis of growth indicators and data available and examining the bank statements will help in identifying the growth trend of the company as well as loopholes in company policy and cash flow management strategy.
2- Cash Flow Forecasting
As the name says, this practice allows forecasting the future cash inflows and outflows in the company. This data is used by companies, big or small, to plan future short-term and long-term investments as well as the expansion of business or its upgradation.
3- Effectively Manage Accounts Payable
Tracking and maintaining records of accounts payable is the most important practice in cash flow management. A periodic accounts payable reconciliation is important to reduce late payments, ensure timely transactions, and forecast expenses.
4- The cash flow formulas
The cash flow formulas are used by the companies to assess cash assets and outflow of cash and predict the coming trend in business growth. These formulas are mentioned below
Free Cash Flow Formula
This formula calculates the amount of cash available for smooth operations in the company. This data helps businesses decide whether to purchase assets or conduct downsizing of their staff. The free cash flow formula is
Cash flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expended
Operating Cash Flow Formula
This formula is like the cash flow formula in the sense that it indicates how much capital resources are available for doing business. The operating cash formula is crucial when applying for a business loan to assess the optimal cash flow in the company, as it involves taxes imposed.
Cash flow = Operating income + Depreciation – Taxes + Changes in Working Capital
Conclusion
Cash flow management is important in tracking, planning, and controlling the cash flow in company operations and investments. Managing the cash flow allows businesses to predict future growth trends and the amount of capital assets available for long- or short-term investment. There are different formulas available for maintaining transparency and accurate records of cash inflows and outflows in the company. The assessment of cash flow is important for the expansion and upgrading of businesses.
Disclaimer: All the information provided in this article on what is cash flow management, including all the texts and graphics, is general in nature. It does not intend to disregard any of professional advice.