Cash Flow Management – ENT650
Once you have developed a cash flow forecasting module, management of it is where you can see where your projections meet reality. Cash flow management is like pinching pennies. You pinch today in order to have reserves for tomorrow to handle those shifts in revenue. But even more than just being frugal, Rogers and Makonnen believe that it includes “…making somewhat complicated decisions about delaying payments to a supplier in order to use the cash resources to temporarily increase production.” (2014, pg. 85) A delay in payment will allow you to float cash for a short period of time, but you will run the risk of insolvency by not paying your obligations when due. Inc. suggests that “Insolvency is the primary reason firms go bankrupt; [whereas] efficient cash management means more than just preventing bankruptcy. It improves the profitability and reduces the risk….” There is a tight balancing act between outflows and inflows to ensure proper cash flow management.
Mismanagement of cash flows creates a bundle of problems for start-ups which include inability to: support consumer demand, manage unforeseen costs, limits growth potential and creates a high turnover rate. These are just a few examples of a slow drain on cash flow that dehydrates the lifeline of the business.
In a case study originally conducted by SmartCompany.com.au, Emily Ross gives best practices for managing cash flows in a “Cash flow boot camp checklist.”
- Focus on sales and debt management
- Create a cash flow boot camp checklist with clear payment terms
- Find a great accountant for daily monitoring
- Chase early, not later by setting clear payments goals
- Communicate, communicate, communicate – be transparent when talking fees
- Get disciplined by issuing timely and correct invoices with follow-up
- Hedge your bets with a mixture of long and short term payments
- Spread out payments to decrease default of total debt owed
- Take further action with debt collections
I believe Inc. sums the cash flow management task when it suggests, “The key to successful cash management, therefore, lies in tabulating realistic projections, monitoring collections and disbursements, establishing effective billing and collection measures, and adhering to budgetary restrictions.” For a new entrepreneur, enlisting the help of an account or accounting software with help to manage cash flows so that you can make profitable decisions about funding your business.
Cash Management. (n.d.). Retrieved September 21, 2017, from https://www.inc.com/guides/finance/cashmanagement.html
Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York, NY: McGraw-Hill.
Ross, E. (n.d.). Entrepreneurs reveal their cash flow advice. Retrieved September 21, 2017, from http://www.business.vic.gov.au/case-studies/entrepreneurs-reveal-their-cash-flow-advice