How to Manage the Cash Flow of a Business

A proper cash flow management is necessary for a company to succeed in its corporate object and to expand itself to other markets. In this article, I explain how to manage the cash flow of a business.

What is Cash Flow?

The term cash flow refers to money and other liquid resources that a company has available. It is an indicator that is based on liquidity, not on profit, and that shows the differences between an enterprise’s income and expenses.

Therefore, it helps businesses to determine how many funds they should spend on complying with their financial obligations, such as paying taxes, rents, or employees’ wages. In addition, it helps to plan future investments aimed at expanding the company.

There are several kinds of cash flow:

Operating cash flow. It displays the amount of money that comes out of and goes into the corporation from its business activities.
Investing cash flow. It gathers all the funds that the company has earned or spent on investments.
Financing cash flow. It shows the movements of financial investments, such as the payment of credits or the funds received from issuing shares.

In this website you can find further information about how to calculate the different types of cash flow of an enterprise.

Steps to Manage the Cash Flow of a Business

1. Making Realistic Previsions to Manage the Cash Flow of a Business

First, you should make budgets that cover all income and expenses. They should include aspects such as product sales, business expenses, employees’ wages, or the payment of rents or mortgages, among other factors.

Moreover, it is useful to set aside a portion of the funds to deal with possible unforeseen events that may arise. To do this, it is necessary not to plot the predictions with perfect scenarios for the corporation in mind.

2. Monitoring Cash Inflows and Outflows

The flows of incoming and outgoing money of a company must be strictly controlled. It is important that expenditures never exceed revenues and that there is a certain margin of liquidity to be able to fulfil the obligations that the enterprise may need to resolve in the short term.

3. Obtaining Funding

There are several ways to get additional funds in the UK. If you are looking to get a capital injection quickly, the best option will be to apply for bank loans. You may also resort to angel investors or venture capital funds. In exchange for shares of the company, they will provide considerable sums of liquidity to the company.

On the other hand, if the business is engaged in certain economic activities or if it is in certain geographical areas, it will be able to access government subsidies. It is not usually necessary to return them, but the money they contribute is limited. Thus, a corporation should combine them with other financing options.

In any case, you should compare the return conditions between the different alternatives.

4. Fulfilling Payment Obligations

The failure of a company to meet its payment obligations can lead to legal problems, which can result in fines for the business or even jail terms for its directors.

Additionally, paying bills and loans on time helps to maintain a good financial reputation. This will facilitate access to funding in the future.

5. Cost Optimization

On the one hand, you should eliminate or minimise all unnecessary expenses and implement money savings measures.

On the other, you should try to lower the rates of service contracts. For example, it is advisable to look for internet and telephony operators that offer the same services and conditions as your current operator at a lower price.

Tools to Manage the Cash Flow of a Business

Firstly, it is essential to count with accounting programs. With them, you can check the daily economic evolution of the company, control its inventory, automate financial tasks or see cash flows projections for the near future.

Secondly, you also need to have a budget and invoice creation software. It must go beyond these two functions, allowing automation of these tasks or being able to connect with accounting programs.

Lastly, you should hire the services of a financial advisor. These can help interpret the data the above tools gather, provide expert advice, or suggest strategies to improve cash flows.

In ukstartcompany, you will find information about how to establish, register and operate companies with different legal structures and business activities in the UK.