5 Reasons to Maximise Cash Flow Management for Your Business

Cash flow management is important for all businesses, big or small.  Not only is cash flow important for business planning and tax planning purposes (e.g. paying taxes on time with cash rather than having it held up in illiquid capital), but it’s also important for day-to-day operations, affecting customers and business performance as a whole.

Below are five reasons why cash flow management is essential for the success of your business:

01. A Cash Flow Statement is Required

A cash flow statement is one of the four core accounting statements that most businesses must prepare when running a business, along with the Statement of Profit or Loss and Other Comprehensive Income, Statement of Financial Position (Balance Sheet) and a Statement of Changes in Equity.

Instead of simply having the statement prepared as part of your mandatory obligations, it’s important to understand what it shows which can be a great asset that should be put to work for you as a business owner.

02. Have Just Enough Liquidity

The old saying that “a bird in the hand is worth two in the bush” certainly applies to cash flow and liquidity. It’s better to have a dollar in hand than a dollar locked away somewhere else, but on the other hand, having all of those dollars in hand can also be a bad thing.

Not enough liquidity can lead to bottlenecks in paying suppliers or covering basic expenditures, which can in turn interrupt business and negatively affect your operations. Having too much liquidity could mean that you’re not investing cash where it is most needed in your business operations. An ideal balance is to have just enough liquidity to cover expenses whilst putting your cash to work for you.

03. Improve Creditor Management

If you’re considering offering credit to your customers, the cash flow statement can give you a much better impression of whether or not extending credit is reasonable, and if so, by how much. Conversely, if your business struggles with an efficient cash flow, removing credit can alleviate the problem.

04. Improve Debtor Management

If your clients or customers have outstanding debts to your business, this could negatively affect your cash flow. There is a certain amount of risk tolerance that varies from individual to individual and from business to business with regards to debt, but understanding your business cash flow can help you to better structure ways of addressing debt and debtors.

05. Streamline Business Processes

Bringing it all together, a cash flow statement is one of the core accounting statements for a very good reason. It gives an accurate snapshot of the ‘health’ of a business in terms of cash coming in and going out.

An efficient cash flow management strategy can help business owners to pinpoint specific areas that need to be addressed and to minimise problems with liquidity, ongoing expenses, credit/debit, and more.

For these reasons, cash flow is often used in order to forecast business operations months or years into the future so that business owners can adapt operations in an efficient manner.

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