Cash flow management

Cash flow management is the process of tracking how money moves in and out of a company.  This process enables managers and CEO’s to know the total amount of money available for business operations after a particular financial year. Cash flow management also helps in determining how much money is available to cover company debts and conduct company investments.  This will help companies in managing their business operations by planning through careful budgeting and financial planning.  Companies will also be prepared when a financial downturn occurs as they will now be able to tackle all the cash flow problems first hand.

Companies should always adhere to cash flow rules and regulations so that they may have constant amounts of money to keep their businesses up and running. Cash flow management helps companies to analyze, monitor and optimize all their cash receipts minus all cash expenses. Running a business without managing its cash flows is like paddling a boat without an oar, useless and disappointing in the end.  This is because a business can end up shutting down completely and will also becoming financially strained. Having a positive net cash flow is an important measure of financial business for any business in operation or at a start-up point.

Cash flow management is an important activity for all business start-ups because if they can’t manage their cash flows in their first year, it is unlikely that they will survive in the second year. Poor cash flow management can make businesses lack the funds to pay their suppliers and this may make the firms bankrupt in the end. Businesses can take the right steps of cash flow management through performing cash flow analysis every end quarter of a year and prevent their companies from shutting down their doors.  Companies should take into consideration three important elements when performing cash flow analysis and they are;

  • Accounts Receivables: What customers owe you
  • Accounts Payables: What you owe your suppliers
  • Shortfalls: When you owe more than your liability

Managing these three elements will push your company to become successful eventually. When you have an imbalance in one of these areas, your business cash flow can be thrown into a ditch and can harm your company. Therefore, it is important for companies to always track their cash flows by looking at how much is coming in and going out to have a positive balance that will help in yielding more revenue for the company.

 

 

Basics of Cash Flow Management

The maintenance of positive cash flow by companies is not an easy process and it requires some best practices to control a company’s financial operations. The following basics of cash flow management can help in driving companies towards future company success;

  • Don’t scale quickly: To obtain a positive cash flow management means being patient with the future growth of an organization. It is important to avoid bad credit such as credit card debts which can cause financial distress.
  • Control your limits: When a business has constant cash flow coming into the business, it is important to save the money in business accounts or invest in shares to avoid overspending on unnecessary business inventory
  • Accounts Payable Knowledge: A strong cash flow management is often achieved when the owners have an overall knowledge of how to spend their company revenues. Good comprehension of company’s accounts payables and receivables will enable manager’s to identify more strategic opportunities for their business growth and expansion
  • Cash flow adjustments: Most business owners fear that they might fail when the cash is directed to activities that are not beneficial to the company. A slight change in a cash flow can create a significant difference. It is therefore important for business owners to have recurring and consistent revenue streams that will make the business cash flow more predictable.
  • Know your numbers: The process of managing cash can end up being cumbersome if the people handling the money are ignorant on every cent that goes in and out of a business. Hiring a CFO will enable a company to manage its financial transactions well and also keep up to date with the firm’s financial forecasts.
  • Cutting on costs: This can be done by negotiating company deals with valuable vendors or buying office equipment and materials in large quantities from suppliers
  • Quick retrieval of cash: When companies sell their services or products to other firms, they should try to obtain the cash obtained as fast as possible. This will enable companies to have more money to work with and to also have a strong cash flow stream.

Strategies of Cash Flow Management

One of the requirements of managing businesses is to ensure that you constantly monitor the money that goes in and out of your business. To ensure that this process is smooth and does not have any knowledge gaps, it’s important to have the following cash flow management strategies;

  • Cash Management: Managing your money is an important strategy that will lead to a healthy cash flow. One should be able to have an idea of what to do with the money to prevent cash shortfalls.
  • Simplify your Accounting: Having an accountant is one step towards managing cash flows easily. When companies hire an accountant, money loss will be prevented thus will lead to positive cash flows in the long run.
  • Cash in your assets: Companies that have been in operation for more than ten years often have idle inventory and equipment within their premises. Selling these items will ensure that the company cash flow levels are managed and controlled well.
  • Monitoring: An important strategy in cash flow management is monitoring the process regularly. The use of quick books in monitoring cash flows is an important approach for company use in cash flow monitoring.

Methods of Cash Flow Management

Cash flow management is the process of delaying your cash outlays and encouraging people who owe your company to pay up their debts as fast as possible. There are various methods of cash flow management and they include;

  • Payment speed: This is encouraging the customers to pay the products or services offered before the end of the invoicing period. This may include an upfront payment from customers or incentives such as discounts for early payments
  • Removal of Inefficiencies: Some inefficiency hampers the smooth flow of cash flows leading to bog company losses. Removal of these inefficiencies will help in improving the smooth flow of cash flows leading to more capital for financing or reinvesting.
  • Managing Payables: As sales revenues increase in a business, it is important to manage all payables to help in controlling company expenses. This can be through communicating to suppliers, having flexible terms and use of EFT payments
  • Measuring cash flow: Ensure that you make accurate cash flow projections regularly. This will help in establishing the total cash on hand at the beginning of a financial period as well as other cash to be received from other sources.
  • Create a Business Account: It is important to ensure that you open a business account which should be separate from your personal account. This will help you in saving the revenue made in a particular financial year and also estimate your cash flow budget for the following year.
  • Short-term financing: This is a type of credit that can help in bridging the gap between receivables and payables. This type of loan can be negotiated with the help of different financial institutions when the need arises.

 

 

 

Benefits of Cash Flow Management

The following are the benefits of cash flow management;

  • Assists in knowing the bank lending requirements
  • Contributes to business success for a long period
  • Business owners can lay down their cash flow needs
  • Helps businesses to achieve their financial goals and objectives
  • Enables companies to plan and predict for large cash outflows
  • Helps managers to understand the key cash flow drivers
  • Improves the communication between suppliers and financiers
  • Helps in identifying ways to avoid late payment penalties

Successful Tips

  • Focus on cash flow management, not on overall profits
  • Encourage your customers to pay up faster
  • Boost sales through using discounts or creating incentives
  • Try and extend payables as long as possible
  • Monitor your cash flow continuously
  • Adopt technological practices in cash flow management
  • Collect all your receivables as fast as possible
  • Ensure to use a cash flow worksheet
  • Maintain some cash reserves for your business survival

Bookkeeping

Bookkeeping is the process of recording all financial transactions in an organization; it’s part of the accounting process in an institution. The various transactions include; purchases, sales, receipts and payments by an organization. Bookkeeping responsibilities fall upon a bookkeeper whose duty is recoding the multiple financial business transactions of an organization. Bookkeeping involves writing of the daybooks and documentation of each financial transactions. For example, if a company borrows Ksh500,000 from its bank the following records are written;

  • An increase of Ksh500,000 must be recorded in the company’s Cash Account
  • An increase of Ksh500,000 must be recorded in the company’s loans account

It’s in every organization’s interest to ensure that there is an effective bookkeeping method. This is to allow the active tracing of every transaction that occurs in an institution. Bookkeeping also acts as a point of reference incases of any controversy in the accounts. Additionally, a company can review its various transactions and get guidelines on their transaction and verify if they are on the right objective.

Methods of bookkeeping

Before beginning the bookkeeping process, an institution must take into consideration and decide on which bookkeeping method to be followed. When choosing the method, the organization must consider the volume of their daily transactions. With such knowledge in mind the following techniques can be applied;

  • Single-entry bookkeeping – this is quite a straightforward technique where a single entry is made for each transaction in the company’s books. These transactions are kept in a cash book to track the various incoming revenue and outgoing expenses. There is no formal training required for the single-entry bookkeeping system. This method will most likely suit small enterprises and sole proprietorship.
  • Double-entry bookkeeping – this is a more sophisticated method compared to the single-entry. It follows certain principles that every transaction affects two accounts, and they are recorded as debits and credits, which must be equal. Therefore, in the double-entry system, a transaction is recorded twice.

Factors to consider

After selecting the type of bookkeeping method, a business should consider how the entries are recorded. A company should consider the use of the following ways;

  • Cash register – this is an electronic machine used to calculate and register all transaction s and cash flows arithmetically.
  • Journals – these are also referred to as the original books of entry. It’s the platform where an institution can record its entries chronologically. Journals can be physical (book or diary) or digital (spreadsheets and accounting programs). A journal contains the data, account debited or credited and the specific amount for each transaction.
  • The Ledger – this is a book or a compilation of accounts. After recording transactions in a journal, they are transferred to a ledger/ book of the second entry.
  • Trial balance – produced from a complied summary of ledger entries.

Importance of Bookkeeping

  • Bookkeeping helps a business to budget – accounting involves the organization of the various revenues and expenses; thus, it is more comfortable to review financial resources and expenses. Therefore, it’s an excellent method that enables a business to create a fully functioning budget which in turn is used as a roadmap for the company. With the creation of the budget, a company can plan future expenses and anticipate that would cover the expenses.
  • Tax preparation – businesses must return taxes annually; most organizations scramble through their desks, looking for missing documents and paperwork. Thus, bookkeeping aids in making the tax process filling process. With bookkeeping, financial information is recorded and makes the institution ready for tax time. Instead of scrambling through papers and invoices, all data is organized in the central system.
  • Organization – Being organized is a skill all organizations should adopt. A business should be able to get the relevant information at any time with ease. Major parties are interested in the institution’s records they include; employees, customers, investors, and loaners. The provision of this information is vital to the various operators in the institutions. Well, the organization of the documents aids in the development of a positive relationship with investors and lenders. Thus, bookkeeping and financial organization of information aid in the proper financial records to be provided to the parties.
  • Analysis – Bookkeeping is an essential activity as it helps with business analysis. Bookkeeping will aid in the tracking of cash inflows and outflows. This type of analysis allows to focus on the company’s strengths and improves on the weaknesses.
  • Better decision-making – with bookkeeping comes there is the improvement of business analysis; thus, there is better decision-making. For the improvement of decisions, there is a need to access all available information and such information provided by the bookkeeping techniques.
  • Planning purposes – Bookkeeping is necessary as it presents the past financial information of an organization; thus, with such information, it becomes easier to prepare for the future of the institution.
  • Better financial malmanagement – bookkeeping is necessary as it aids in controlling the business’s finances. Bookkeeping aids in the representation of a clear picture of the institution’s money.
  • Tracking Profits and Growth – Bookkeeping is essential as it aids in the showing of the business profitability. Additionally, bookkeeping aids in the tracking of business growth. Due to the accumulation of years of data and analysis, there is a greater understanding of the company; thus, there is the tracking of the growth and profits.
  • Tracking of cash flows is improved – with bookkeeping; there is a better and more improved cash flow process. A business can track the various revenues, expenses, and liabilities. Additionally, consumer and vendor invoices are paid.
  • Provision, a general snapshot of the business – bookkeeping, provides financial information in the form of financial statements. These statements provide a general overview of your business, allowing you the ability to see how well the company is performing.

Tips of Bookkeeping

  • Separate business and personal finances
  • Always try to automate what you can
  • Perform regular financial checkups
  • Always keep records of business expenses