What is Cash Flow Management?

Cash flow management is a financial planning tool to help businesses use their cash effectively and efficiently. Even how profitable your business is, if cash is not managed correctly, you will be in trouble. Especially for start-ups with limited resources, the more crucial it is to have proper cash flow management to assess the cash’s ins and outs. Cash flow management can help you foresee the day-to-day operation, and more so for weekly or monthly cash flow projections.

Since start-up’s earnings are invested back to business for growth and expansion, knowing the cash timing can help them prepare for back-up sources, such as from own additional investment, borrowing through banks or bonds, and investors.

Having positive net cash flows means the business has enough capital to finance the day-to-day operation. A negative cash flow, on the other side, does not necessarily mean that the business is not profitable but can be an effect of cash flow mismanagement. To properly handle your cash, it is best to prepare a plan on using it for efficiency and productivity of running the business.

You can access eFinancialModels for a variety of cash flow projection templates.

Why is Cash Flow Management Essential for Your Business Success?

Predicting when inflows are coming will help you to schedule better paying for suppliers and vendors. Many businesses did not succeed because they are not profitable, but because they run out of cash. With start-ups limited resources, the more challenging and crucial it is to manage cash due to a tighter margin of error.

What are the benefits cash flow management can offer? Let’s discuss these significant advantages below.

1. Accurately Project Cash Requirements


It can be hard and time-consuming to prepare cash flow projections, but it would be worth it. Being able to project both inflows and outflows can help you properly utilize and optimize resources. It will improve the company’s efficiency in handling its working capital to sustain its day-to-day operation.

2. Help Enhance Liquidity


You don’t want to pile up excess inventory to limit your cash availability or not deliver because of limited inventory. Cash flow management will also result in proper monitoring of accounts receivable for timely payment from clients to enable the company to pay the bills on time. It would be helpful to have a good relationship with your vendors to avail better credit terms.

Proper planning enhances your liquidity not to disrupt the business operation — for it to operate smoothly.

3. Put your Mind at Ease

Having many variables that you don’t know about the future can bring worries. Even though you can’t be prepared for everything, having enough measures to approach probabilities can give you peace of mind.

4. You are Prepared for Expansion


You don’t know when opportunities knock on your door. You must be prepared to grab it. Having impressive goals without enough resources will indeed not materialize. In case you want to seek capital from banks or investors to finance expansion. When you have excess resources at hand, you can invest in opportunities when they come. Proper cash flow management can fuel growth to help the company achieve its short and long-term goals.

5. You Can Gain Leverage


It is easier to gain the lenders’ and investors’ trust when you have a positive cash flow. It is an indication that you are running the company well. They can assess from your cash flow how and when you will be able to pay for borrowed capital or distribute dividends. Gaining their trust can get you good terms for additional capital. Showing profit would not be enough for them, but the cash flow is a more realistic measure for the financial condition. Given, of course, that other financial ratios are excellent.

Cash flow management can serve a long way for your business success. As it says, cash is king. You cannot do anything without cash to finance the business operation. Properly planning when the cash comes in and paying for expenses on time will keep your company running and afloat.

How Cash Flow Differs from the Income Statement?

The income statement is one of the critical financial statements, but it does not capture some essential factors. To assess cash flow management to the income statement, let’s evaluate accounts that differ in recording for cash flow and income statement.

1. Cash


Only cash transactions are considered in the cash flow statement, making it transparent how much the available cash is to finance the day-to-day operation. Since the income statement is on accrual accounting, which records both sales from cash and on account, a portion of the sales will not be available right away for business use.



CAPEX is not directly accounted for in the income statement, which may look like the business has enough resources. However, a bulk amount of CAPEX can significantly affect your cash flows that may even become negative if the purchase is not planned correctly. Cash flow management is an essential tool for CAPEX investment decisions.

3. Depreciation and Amortization

Depreciation and amortization are not actual cash spend for the operation but rather an allocation on the wear-and-tear of assets and spread of costs across the assets’ productive years. It can also be easily manipulated since the company decides how to allocate depreciation and amortization. Cash flow adds back this cost and more transparent in assessing how the business is doing. It makes free cash flows more reliable when assessing business profitability and performance against competitors and the industry average.

4. Debt Repayments


Debt repayments significantly affect cash flows. That’s why lenders closely evaluate cash flows if you apply for a loan. Cash flow shows how and when the business can pay its debt. The income statement does not account for this cost since debt repayments are not part of the operating costs but rather a capital cost.

Cash flow management is essential in assessing the availability of a company’s financial resources. It accounts for cash transactions that make it transparent for the company, its lenders, and investors how much the cash is available to finance operation, pays off debt, and distributes dividends.

For additional material for cash flow management, you can see it here.

About Jeanette Iglesias