Why Cash Flow Management is Important and Best Ways to Improve It
Cash flow management is an ongoing juggling act for business owners. It requires constant attention, balance and a clear understanding of the money coming into your business as cash assets leave.
That’s right, managing cash flow isn't something you can get 100% right overnight. But with careful planning and the right processes, you’ll soon be able to nail down a polished system that runs quietly in the background – helping your business grow.
With a cash flow management plan, you can take care of cash flow problems, and make agile decisions. In this blog, we’ll show you how to build that simple framework. But first, let’s define what we'll be talking about and understand why it’s so important.
What is cash flow management?
Cash flow management is keeping a watchful eye over the money coming into your business, and tracking that against your outgoings. You may be waiting on an invoice to be paid, while having to pay employees, property costs and bills at the same. Cash flow management is how you take care of those situations.
Poor cash flow management is the reason why 82% of small businesses fail. But when done well, you get a clear and extensive view of your costs versus the revenue entering your business. It's what allows you to pay and make profit at the same time.
Why is it important to manage cash flow?
As mentioned, effective cash flow management props up one of business’ core functions: making money while keeping the people that help you make it happy. So it’s vital you always have a firm grasp of how yours is performing. Here are some other reasons why a well-oiled cash flow management system is so important:
Get a real-time view of business spending
Cash flow management for small businesses gives you a clear view of the money on its way in and out of your business. When you see more, you can control more – and you’re in a much better position to make decisions. You can also assess which areas are driving success, and where there’s room for improvement. Are there areas where you’re seeing a positive ROI while others struggle?
Plan and forecast better
Unfortunately, there’s no crystal ball for business owners. Regular reporting comes close, though. It gives you a snapshot of where you’re spending your money, which you can then use to plan better. That level of foresight starts with cash flow management. You’re able to see which expenses might be higher this month and, as a result, prevent overspending. This level of expense management puts you in control of what seemingly used to be out of your hands.
Maintain and build better relationships with suppliers
Businesses depend on other businesses. Of course, maintaining relationships with your customers is vital, but it’s as important to keep your suppliers on side too. Many relationships between businesses break down over late or failed payments. And it’s likely that a lot of those breakups are traceable back to poor cash flow. When managed properly, you can pay vendors on time. Everyone involved stays happy.
How to improve cash flow management
Later, we’ll be sharing a simple plan to help you streamline and simplify how you manage your cash flow. Until then, here’s a list of other things you should consider when trying to manage cash flow.
Maintain accurate bookkeeping
We know that bookkeeping can sometimes be last on a long list of things to do. It may not be the most glamorous part of running a business – but a lot of the time those jobs are non-negotiable. So your books should be as up to date and accurate as possible. You’ll save yourself plenty of time going through many transactions. And you’ll also get a real-time view of your business activity which is great for forecasting.
Make invoicing easy
Invoicing is standard practice for most business owners. Saying that, many struggle with their cash flow because of inefficient invoicing which can lead to unwanted stress. It’s more than likely the reason why around 60% of businesses fear the impact of late payments will grow this year.
When you send an invoice, you shouldn’t be left waiting in the dark. That might mean being proactive in chasing those invoices down, sending them earlier or even asking for upfront deposits. At the other end of the invoice spectrum are the bills you have to pay. Cash flow is as much about managing the outs as it is the ins. So you should try to make payments to your suppliers as simple as possible.
Again, automation has a huge part to play in making that possible. Features like Dext’s invoice Fetch automatically collect your invoices from suppliers that bill online. So whether it’s a utility or energy bill, those invoices will appear in your Dext account, ready for payment.
Build a cash reserve
Every business faces a rainy day once in a while. That might be down to you, or matters completely out of your hands. Sales may drop. Suppliers may come and go, but none of that should be of too much concern when you have a healthy cash reserve.
It’s there as a safety net for when the going gets tough. It softens the blow and gives you something to fall back on when times are hard and your revenue dries up. A cash reserve should be able to cover between three to six months of your ordinary expenses. If revenue is a concern, you could also cut back on premium expenses or even pay yourself less for a while.
Wrapping up
So there you have it, a no-frills primer on cash flow management and ways to improve it. The key takeaway here is to make sure that your business is always working with the right numbers. While forecasting and reporting are great, it can all come undone if the data is wrong. Granted, your core cash flow work takes place within your general ledger and management software, but it starts with accurate data capture. Without it, managing cash flow can soon feel like a juggling act where nothing seems to land.
If you’d like to find out more about cash flow and how to improve it, click below to download our Beginner's Guide to Smart Cash Flow. You can also explore Dext Prepare's award-winning extraction, automation tools and thousands of integrations with other business finance providers.
