A company’s cash flow shows the movement of cash into and out of its coffers. Cash flows in a company are mainly of three types — operating, investing, and financing. Operating cash flows relate to production and sales. Investing cash flows relate to investments, and financing cash flows relate to transactions like obtaining funding and paying dividends. Cash flows are considered positive when the total incoming cash amounts are greater than the outgoing amounts for any given period. A cash flow is considered negative when the outgoing cash exceeds the incoming amount.
A negative cash flow may not always signify the poor financial health of a company. When a company is pursuing growth, lucrative long-term investments, purchasing assets, or conducting much-needed research, the outgoing amounts of cash may be much larger than that coming in. The same happens when a company has just started and has yet to break even. However, money is required to pay salaries, debts, duties, and other periodic financial liabilities. And if a company’s cash flow is not planned correctly, you won’t be able to pay your dues on time, thus upsetting the creditors and employees.
To manage your cash flow properly, you must always be aware of your sales and disbursement cycles. Your sales cycle tells you how long and how much it costs to acquire or produce a product, sell it, and receive the money. Your disbursement cycle tells you the timings of your regular outgoing payments to suppliers, employees, creditors, and others. If these cycles do not overlap in a balanced manner, then it may lead to a liquidity crunch or a financial crisis. Hence, business owners need to monitor their cash flows closely and efficiently with weekly, fortnightly, or monthly reporting to match periodic sales and disbursement cycles.
Last but not least, to manage your cash flows proficiently, you must create periodic cash flow statements and strive to predict cash flows based on data and past experience accurately. Furthermore, you should regularly review your outgoing expenses and try to reduce them. At the same time, set aside emergency funds to accommodate unanticipated disruptions to cash flows and unexpected expenses. Managing your cash flows is closely related to managing your working capital; almost the same principles apply to both of them. The adverse outcomes will also be quite similar if either is not managed properly.