Cash Flow Management

One of the common causes of business failure is poor cash flow.

A profitable business with strong growth may fail due to cash constraints. This is because business profit does not equal cash in the bank.

Factors Affecting Cash Flow:

  1. Profit – if a business is not making a profit there will be strain on cash flow. A business owner may prop up the business by injecting personal cash or taking out a loan, however if a business is making consistent losses eventually it will fail.
  2. Debtor collections – Debtors refers to the funds owing from customers. Under accrual reporting, a profit and loss statement will include the income owing from debtors. The amount of available cash for business outgoings will be reduced when there is money owing from customers.
  3. Supplier payments – The amounts owing to suppliers, or creditors, also impacts the amount of available cash of a business. If you owe money to suppliers the true amount of funds available to the business is reduced as those funds are theoretically spent.
  4. Staff Idle Time – Where employees are idle, the business is incurring wages and associated costs for no return. Examples of Idle time include the result of inefficient activities, system outages, wasted time.

How Cash is Used in Business

Cash Flow is simply the movement of cash in and out of the business.

Cash inflows into the business can come from the following sources:

  1. Sales
  2. Borrowed cash (loans)
  3. Sale of assets
  4. Capital injections (contributions from owners with no expectation of repayment)

The business will use cash to pay for:

  1. General expenses
  2. Purchases of assets
  3. Purchase inventory for resale
  4. Make loan repayments
  5. Make tax payments

The Cash Gap:

The cash gap is the difference between the amount of money coming into the business and the amount going out.

Where the amount of money coming in exceeds the amount going out you have positive cash flow. Where the amount of cash going out is greater than the amount coming in you have negative cash flow.

You can improve the Cash Gap of your business by:

  1. Invoicing promptly and regularly
  2. Increasing the time to pay suppliers
  3. Decreasing the time to collect from customers