Cash Flow Management

The ultimate goal of cash flow management is maintaining coordination between payments & receipts, also to ensure that the business does not run into cash shortages. Cash flow management is not related to profitability of company, as positive cash flow making company can still be loss making company.

Cash Flow Management is a process to manage and control the inflow and outflow of funds. The important aspect of cash flow management is to ensure that inflow of fund is always greater than outflow of fund so that company shall have surplus funds.

Many businesses fail due to poor cash flow management. Cash is like blood for any enterprise and its flow shall be necessary for working of the company.

Signs of Cash Flow Congestions:

  • Lots of short-term borrowings,
  • Too much receivables and irregular payment cycles,
  • Too much dependence on big customers for payments,
  • Not receiving any cash discounts on payment,
  • Not receiving adequate credit period for payments,
  • Too much inventory in stock while having slower sale rate.

Advantages of Cash Flow Management

  • Effective Management of Payables and Receivables
  • Survival during shortfall of cash inflow.
  • Solvency and Good credit worthiness
  • Enabling capital expenditure and investment
  • Improved vendor relations
  • Managing positive and negative cash flows
  • Better control over cash movement
  • Better management of all fixed expenditures
  • No occasional cash shortage

Best Practices for Cash Flow Management

Identify the Business Risks and Provision for any un-certainty in advance: As businesses are becoming more challenging day by day, it is important for the business managers to identify the potential risks involved in the business and initiate necessary preparations to avoid uncertain losses. The business should always be ready to face potential risks without much impact on its operations.


Multiple Bank Accounts for business: Business enterprises make a common mistake maintaining only one bank account. In case of any technical issues in the bank account operation, it may become difficult for smooth functioning of finance operations. Having more than one bank accounts help manage cash flows with ease.


Inventory Efficiency monitoring: The highest and lowest selling inventory stock should be monitored, procured and maintained accordingly. Further slow & non-moving items of inventory that block substantial amount of working capital should be identified. Inventory should be managed up to the optimum level with safety margins as required.


Always maintain additional funds: It is advisable to the company to maintain minimum 3 months buffer liquidity for the days when business doesn’t have enough cash flows.


Implementation of accrual management system: The invoices for purchases are generally not received in time. Many vendors issue their invoices before, with or after the delivery of goods or services. So at the time of settlement it often becomes difficult to ascertain the exact due to the vendor. However, such problem will not exist if we manage accrual management system or Invoice processing system. This information will further help the businesses to arrange for payments on or before due dates.


Cost cutting by control of Cash outflows: The Best way to control cash outflow is to keep an eye on the expenses. At the time when good cash flows are generated many businesses forget the opportunity of cost cutting. The unmanaged cash outflow activity leads to financial crunch in the business at the time of slower cash generation.


Cash should be always appreciable: Many banks accepts flexible deposits and pays fixed interest on such deposits. After meeting minimum cash balance requirements, surplus can be invested in Certificates of Deposits, Saving Bonds, Money Market Deposits etc. For maintaining liquidity, companies should avoid long term deposits.


Focus on cash flow rather than profits only: Many businesses do not plan their cash flows and only think about profits in the business. Efficient handling of cash flow is essential for the making optimum profits.

Step to fix Cash Flow Problem

Short term financing: For any emergency purchase or payment, short term finance is best option so that gap between payables and receivables can be mitigated. Many banks and financial institutions provide short term finance facilities.


Long term financing: For purchase of any assets or equipment long term finance should be obtained rather than the company’s working capital. Working capital should be reserved for daily operations of company.


Speedy recovery of Receivables: A system should be developed for early billing and timely collection to start recovery of all the receivables within a given time frame and the same should be communicated to all the debtors. Further discounts may be offered to the debtors for quick payment of dues to encourage speedy recovery.


Liquidation of Unused Assets: Assets or equipment in business which are not in use and inventories which are obsolete should be considered for selling. By selling such asset, inventory or equipment, extra funds are generated. If the asset is sold at less than the book value then there is tax loss which can be adjusted against any other business profit.


Management of Account Payables: It is beneficial to lag the payables in case of cash crunches but the same shall be communicated with vendors. The relationship with the vendors however should not be affected. Hard negotiations can be done with the suppliers/ vendors at the time of entering into a contract to provide longer credit periods for the amounts payable.


Payment of Statutory dues: Statutory dues must be paid on or before the due date to avoid defaults. However, such payments should be efficiently handled to ensure maximum utilization of available working capital. For e.g. TDS for a month is generally required to be deposited by the 7th day of the next month. The best time to make this payment is sometime between 5th to 7th day of the next month as it would ensure maximum availability of working capital throughout the month without attracting any penalty/ interest.

Cash Flow Management is a process to manage and control the inflow and outflow of funds. The important aspect of cash flow management is to ensure that inflow of fund is always greater than outflow of fund so that company can have surplus funds.

Break Even Point is a point where total expenses and total revenue is equal. It is point where no profit or no loss arises.

It is the portion of capital used in business for day to day trading operations, it can be calculated as-

Working Capital= Current Assets- Current Liability

A cash flow statement includes following activities:

  1. Operating Activity
  2. Investing Activity
  3. Financing Activity

Grouping of these activities provide segregated information to users of financial statements and also assess the value of cash and cash equivalents.

When cash flow is negative, business is not able to pay their debt or bills and is forced to borrow money from banks or financial institutions leading to creation of new liabilities and interest expenditure which affect the financial position of enterprise.

What’s Included

  • Account Reconciliation
  • Payable processing
  • Budgeting
  • Cash Flow Forecasting

Documents Required

  • List of vendors/ suppliers
  • Bank statements
  • Any other documents as may be required

Cash Flow Management


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