Tip jar titled 'cash flow' and a bar graph indicating a positive cash flow

Contents

  1. 1. What is cash flow management?

What is cash flow management?

July 8, 2021
From working out your cash position to juggling various financial obligations, there's definitely a lot to wrap your head around, especially if you're a new business owner running your first start-up.With that in mind, it can be tempting to prioritise other aspects of your business over doing the accounting. However, good cash flow management is the key to making sure you have enough money to keep your business going, and a good cash balance can be the difference between a growing business and a failing one.In this article, we’ll tell you everything you need to know about cash flow management, what makes up a cash flow statement and why a good cash flow can be essential to your business's success. We'll also offer some tips and tricks on how to overcome any cash flow problems you might be having, from chasing up late payments to navigating a negative cash flow.

What is cash flow management?

Put simply, cash flow management is the process of documenting the flow of money going in and out of your company. With cash flow statements, you can analyse the cash inflows and cash outflows carefully to determine the financial health of your business and whether there are any changes that need to be made.Money can come into your business through sales, interest, royalties, investments or licensing agreements and goes out as expenses.Read on to learn about cash flow management in more depth.

What does cash flow management mean in business?

When it comes to running a company, making sure you have enough cash to keep your business afloat is the most important thing you can do. Financial reporting is essential for assessing your company’s flexibility and overall performance, both in the short-term and the long-term.While it can be done for any time period, it’s normal for business owners to conduct a cash flow analysis on a monthly basis.To work out your net cash flow, all you do is add up all your cash payments over a specific period in time and take that figure away from the total of your cash receipts over the same period. A positive cash flow indicates that your cash flow balance is greater than zero, where important cash inflows take place before cash outflows (for example, a client pays an invoice before you have to pay for supplies to deliver that service). On the other hand, a negative cashflow suggests that you have a significant sum of money going out of your account before the money needed to compensate for the sum comes in.If you have a positive cash flow, you’ll have the opportunity to grow your business, while a negative cash flow means you’ll have to find some money elsewhere in order to pay off any debts.Even if you’re bringing in more money than you’re spending overall, your cash flow offers a better insight into how your business is doing than your turnover. It could be that you’ve signed a new client – which increases your revenue and earnings – but late payments could lead to money coming in later than when you actually need it. If that were to happen, you’d have a cash flow problem.For a more accurate representation of how your business is running, a good rule of thumb is to conduct a cash flow analysis that covers a three month period. This is because unexpected costs can occur that lead to cash shortages, which would upset your monthly figures more than they would your quarterly ones.When understanding cash flow, there are a few key terms to be aware of:

Cash Flow Statement

Your cash flow statement can help you manage your finances better. It’s a summary of how money moves in and out of your business during a set period, allowing you to plan and coordinate your accounts. It’s made up of three sections and is reported on a quarterly and an annual basis.
1. Cash Flow from Operations (CFO)
Operating cash flow is the amount of money you’re bringing in from regular, ongoing activities. You may have heard it referred to as 'profit and loss'.It’s the first section that appears on your cash flow statement and is the main indicator of how financially successful your business is operating, based on its core activities.To calculate your cash flow, you subtract the total cost of your expenses over a set period from the amount of cash received. You’ll then have an idea of whether you have just enough to cover bills and operating expenses, you’re in a position to expand your company, or you need to apply for external funding to stay in business.
2. Cash Flow from Investing (CFI)
The second section of your cash flow statement documents any money you’ve made or lost from investing activities. This includes the acquisition and disposal of investments in stocks, bonds or real estate, as well as other non-current assets. A non-current asset is an asset for which the value has not yet been realised and will not be realised within the current financial year, this could be in the form of equipment, property, intellectual property or long-term investments.
3. Cash Flow from Financing (CFF)
Financing cash flow is the third section of your cash flow statement. It gives an indication of how your company funds its operations and will usually include changes in all accounts related to debt and equity so that investors have an insight into your business’ financial strength. Some of these financing activities include:
    EquityPaying dividendsTransactions involving issuing debt

Profitability

Being profitable and having a good cash flow isn't the same. Cash flow represents what is actually going in and out of your business bank account over a given period of time, tracking when exactly money is coming in and going out. On the other hand, profit refers to the amount that you're making on the goods and services you're selling after costs to produce the product or run the service have been taken into account.Having a good cash flow does not necessarily mean your business is profitable, and having a negative cash flow does not always mean that you're not making a profit. For instance, you might be turning a profit on the goods and services you are selling, but if you have a poor cash flow it is unlikely that you'll be able to meet your financial obligations on time, ultimately leading to financial shortfalls in future.

Expenditure

It’s a good idea to compare your estimated revenue with your expenses so you can set realistic goals for the future. Here are a few examples of what this might include:
    Advertising – Are your advertising costs ongoing or do you pay for them in one lump sum?Bills – Stay on top of what you owe, who you owe and when they need to be paid.Paying contractors – Note whether you do this hourly or when a project is completed and check who is responsible for paying their tax and National Insurance contributions.Payroll – Paying your employees at the same time each month helps manage your cash flow, as does automating it, which you can do with Ember.Purchasing office equipment – Make sure you keep any receipts so you can accurately file your tax return. This is another benefit of using our software. They’ll be kept safely in one place and are easily accessible when you need them.Taxes – It's good to get into the habit of setting some money aside regularly to cover the cost of any tax bills.

Accounts receivable and accounts payable

Accounts receivable refers to any money that’s owed to you for the goods or services you’ve already provided. Accounts payable covers money you owe to a vendor or a supplier for their goods or services.

Why cash flow management is so important

If you don’t keep on top of your cash flow, a number of things can go wrong. It’s important to identify some of the following potential problems, so you can put a plan in place to stop them from happening:
    Being over-ambitious – It’s great that your business is turning a profit, but before you start trying to grow your company, your cash flow needs to be healthy.Leftover stock – Misjudging the demand for a product can leave you with a lot of leftover stock that’s difficult to sell.Spending too much – Spending money you don’t yet have isn’t a good idea. Even if you’re expecting a payment from a client, there’s no guarantee you’ve got it until it hits your bank account.Waiting too long for payments – This can really upset your cash flow, as some expenses can’t wait until the money comes in (we give advice on how to go about chasing money from a client in the next section).

How to fix a cash flow problem

A negative cash flow can make it difficult to pay employees and bills, as well as delay any plans for expansion. Here are some of the things you can do if you have a cash flow problem:

Budget better

In business, better budgeting isn’t always as simple as spending less. There are three things you can do to make sure you’re managing your cash flow effectively and budgeting better:
  1. Generate a cash flow statement so you can see all your income and expenses.
  2. Plan ahead by setting cash aside for unforeseen circumstances and organise payments according to how urgent they are.
  3. Forecast your expenses by estimating your costs over a set period to see which months have more outgoings than others.
Talking about money isn’t always easy. It can be especially awkward when you have to ask for overdue money from a client. With that in mind, here are some tips on invoicing clients and chasing any late payments:
Be clear from the start
Late payments can cause a lot of stress, especially for small businesses as they could leave you in a cash flow crisis. That’s why it’s important to be clear about things like payment amounts, due dates and how payments are made from the very beginning. Asking for a deposit can also ease the pressure if a client defaults on future payments, and encourage early payments from clients if possible.
Automate your invoicing
Invoice more regularly
Sending invoices every two weeks instead of every month means you’re making more regular contact with your client, meaning you’re more likely to be at the forefront of their mind. You might also find it better for your cash flow to have two smaller payments coming in each month, rather than just one big one.
Pick up the phone
If you have a client who regularly misses payments, you might have to be more active. An email is easy to ignore but speaking to someone directly can carry more weight, as it’s a reminder that there’s a real person there.
Get some outside advice
Speaking to someone else about what you’re charging and spending in comparison with your competitors can give you an idea of where you’re going wrong. Unlike other online accounting software, Ember is run by accountants and tailored specifically for founders. Combining accounting software with qualified experts, we’re a two-for-one service and can give you advice on how to improve your cash flow management.
Daniel Hogan
Daniel HoganCOO & Co-Founder

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