Cash flow management

8 min

Cash Flow Management: The Ultimate Guide to Financing Businesses

Cash flow management is a must for every business, but it can be difficult to know where to start. This guide is here to help you gain a thorough understanding of the fundamentals needed to master cash flow management.

Glen Foster

Glen FOSTER • Libeo

Published on | Updated on

What is cash flow management in business?

Cash flow management is a process of planning, monitoring and controlling the movement of cash within a business. Cash can be defined as currency or checks, credit card payments or electronic transfers. Cash flow management is used by businesses to ensure that they have enough cash on hand to pay bills and meet other expenses.

Different types of cash flow

Cash flow management is typically concerned with two types of cash flows: inflow and outflow. The inflow refers to incoming funds, while outflow refers to outgoing funds. Businesses need to have enough cash coming in from sales revenues in order to finance their operations and pay their employees. At the same time, businesses need to spend money for producing goods or services in order to generate profits for shareholders.

Moreover, cash flow management can be divided into two main areas:

  1. Cash forecasting - predicting your cash flow from month to month or quarter to quarter so that you know when to expect money coming in and going out. This helps you plan for expenses and payroll, as well as make sure that enough money is available for unexpected expenses or emergencies.
  2. Cash management - controlling the movement of cash within the business to ensure that it's used wisely and efficiently.

What is the main purpose of cash flow management?

The main purpose of cash flow management is to make sure that there are sufficient funds available from both sources at all times so that businesses can continue operating smoothly and efficiently without having any financial problems such as being unable to pay employees on time or making late payments for suppliers' invoices.

A well-managed cash flow helps prevent overspending and helps ensure you have enough money coming in so that you can make timely debt payments. It also alerts you when there are problems with your financial operations so that you can take action before things get worse.

What are the Big Three of cash management?

When talking about the big three of cash management people are referring to:

These three things work hand in hand to deliver a cash flow that runs the business every day. Without effective cash management, a business risks failure in both the short and long term.

What is a 3 way cashflow forecast?

A three-way forecast, or 3 financial statements is a financial model combining three key reports into one consolidated forecast:

  • Profit & Loss (income statement)
  • Balance sheet
  • Cashflow Statement

Also known as statutory accounts, financial statements are legally required to be produced annually by businesses. So you can forecast your future cash position and financial health.



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Why is cash flow management important?

Cash flow management is a crucial aspect of any business. It is one of the most important ways to achieve financial success.

If you don't manage your cash flow well, it can affect your ability to pay employees and suppliers on time. Not only does this create bad feelings between you and the people who work for or provide goods for your company; it also makes them less likely to want to continue working with you in the future.

If you don't have enough cash available when invoices come due, then they might not get paid on time — and these days late payments can be extremely costly since many companies charge interest on late payments. This could result in penalties or even legal action if they decide they want their money back immediately (or if they feel like they deserve compensation).

Cash is king: why cash flow is crucial to SMEs

At the start of 2022, there were estimated to be 5.47 million small businesses (with 0 to 49 employees) or 99.2% of the total business population (source: However, SMEs live and die by their operating cash flow.

A Xero Small Business Insights (XSBI)'s report entitled Crunch: Cash flow challenges facing small businesses published in July 2022 found that more than 9 in 10 small businesses experience at least one month of negative cash flow each year. Furthermore, one in four businesses in the United Kingdom is experiencing more intense cash flow stress, being cash flow negative more than six months each year.

Rates of cash flow crunches varied significantly by key industries, both before and during the COVID-19 pandemic. In 2019, UK small businesses in the professional services industry were less likely to be cash flow negative in a given month (38%) compared to those in the retail and hospitality industries (45% and 44% respectively).

Common cash flow problems facing small businesses

Many entrepreneurs face cash flow issues during the startup phase of their businesses. This is especially true for those who are first starting out and don't have any prior experience with managing money.Here are some common issues that may cause cash flow problems:

  • Poor accounting / budgeting practices
  • Under-capitalization
  • Inaccurate forecasting
  • Inadequate payment systems
  • Inventory Management

How a implement a top-notch cash flow management process

Controlling your cash flow is the most important aspect of business. A top-notch cash flow management process allows you to predict what will happen with your finances so you can make better decisions about future:

  1. Investments and spending
  2. Budgeting and planning
  3. Forecasting and monitoring
  4. Controlling and optimizing

Tightening up your cash flow management process can dramatically improve your ability to operate within budget. Even if your company's cash flow is already in good shape, having one will help you keep it that way for years to come. With adequate information on daily sales and expenses, you can make informed decisions about how much cash is needed in order to meet your monthly targets.

What are the steps of cash flow management?

So how do you go about innovating or improving your process? You can use these 5 steps:

  1. Track Everything - start with tracking key metrics related to your business such as revenue and expenses.
  2. Set Targets - what are you trying to achieve? What would success look like? What is a good number of sales compared to other businesses in your industry?
  3. Decide on Key Performance Indicators (KPI's)- what are the indicators that will help you reach your targets? These are the metrics that will drive your success.
  4. Develop Your Own Models- models help you put everything together and make it understandable for everyone involved in the decision-making process at every level of your organization.
  5. Communicate Sustainably- communication is key! This involves communicating long term goals and targets as well as developing effective internal and external communications channels so that everybody knows what's going.

Cash flow management techniques

Your second step is determining what type of cash flow management process is best for your business. There are several different methods that can be used:

  • Straight line amortization: This method uses straight line amortization over the life of the asset to determine its value at any given time. It's commonly used when accounting for assets such as equipment, machinery and buildings because it allows you to easily calculate depreciation amounts over time.
  • Declining balance depreciation: This method uses a declining balance formula over a specified period of time to determine depreciation expenses on an annual basis. It generally results in lower tax liabilities than straight line amortization and is most commonly used with shorter term assets (usually less than five years).
  • Sum of years' digits depreciation: This method uses the sum of all digits in a number (1+2+3+4+5=15) times an assigned percentage rate to determine the annual depreciation expense on an asset.
  • Lump sum depreciation: Lump sum depreciation is based on the value of an asset at the time of purchase. You may opt for this method if you don't want to account for depreciation over time or if your business has just purchased a new piece of equipment.

A key component of a top-notch cash flow management process is forecasting. When it comes to forecasting revenue, there are two main approaches: bottom-up and top-down.

  • Bottom-up forecasting involves looking at individual products or services offered by a company and estimating what each one may bring in over time based on historical data and current trends in the industry.
  • Top-down forecasting works by looking at macroeconomic factors such as GDP growth rates or interest rates and then applying those numbers to individual products or services offered by a company.

Cash flow management tools

The two main components of cash flow management are forecasting and control. The following are some of the key areas that should be considered when implementing a powerful and seamless cash flow management process:

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