Cash is king” is a common phrase that signals to business owners that they should pay close attention to cash flow and its management. Businesses can be top line strong or have steady bottom line profits, but without cash, they cannot move forward.


Cash flow quickly becomes one of many reasons hard to get a new business off the ground. However, Cash management, when done properly, can indicate oncoming issues and ongoing problems and drive solutions. So, a process, known as cash flow management is adopted which helps an organization to maintain control over the inflow and outflow of funds and to ensure that the inflow of funds is always greater than outflow so that the business sits on a surplus. Money or cash is the lifeblood of any business so when the cash stops circulating, all the critical operations come to a standstill.

According to a study performed by Jessie Hagen of U.S. Bank, 82 percent of businesses fail because of poor management of cash flow. More likely, if a business constantly spends more than it earns, it has a cash flow problem.

What is Cash Flow?

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. It can be positive or negative. Positive cash flow indicates that a company has more money moving into it than out of it. Negative cash flow indicates that a company has more money moving out of it than into it.

Cash flow can be further broken into three major categories:

• Operating cash flow: This refers to the net cash generated from a company’s normal business operations. In actively growing and expanding companies, positive cash flow is required to maintain business growth.

• Investing cash flow: This refers to the net cash generated from a company’s investment-related activities, such as investments in securities, the purchase of physical assets like equipment or property, or the sale of assets. In healthy companies that are actively investing in their businesses, this number will often be in the negative.

• Financing cash flow: This refers specifically to how cash moves between a company and its investors, owners, or creditors. It’s the net cash generated to finance the company and may include debt, equity, and dividend.

Cash flow is typically reported in the cash flow statement, a financial document designed to provide a detailed analysis of what happened to a business’s cash during a specified period of time. The document shows the different areas in which a company used or received cash and reconciles the beginning and ending cash balance payments.

Cash Flow Statement

The cash flow statement measures how well a company manages its cash position, meaning how well

the company generates cash to pay its debt obligations and fund its operating expenses. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on a solid financial footing. Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay its debts.

Problems faced and their solution for better Cash flow Management:

Not having a cash reserve

Most businesses have an inadequate cash reserve or even worse. This situation leaves businesses unprepared to handle unexpected circumstances and emergencies.

Solution: The solution is simple but requires discipline. Start building a cash reserve for the business. Depending upon the circumstances, build the cash reserve to cover a few months of business expenses. Three months is a common number used by experts. Having a budget of current and forecasted expenses helps in this process.

High overhead expenses

Overhead expenses are the costs of running a business that is not tied directly to selling a specific product or service.

Examples of overhead include Rent, telephone, utilities, etc.

High overhead expenses are particularly challenging and can hurt a business’s cash flow to a great extent until corrected.

Solution: The solution is simple but not easy. Audit the expenses and cut back where possible. Be careful not to cut too much, as that approach could also hurt the company.

If not possible to cut back, consider cheaper options. In fact, every business should audit expenses regularly to ensure that overhead expenses stay in line.

Expensive Debt

Excessively high debt payments often cause companies to not afford their existing financing. This is common for companies that have cash advances or other high–priced loans.

Solutions: If the cost of debt is too high and takes most of the revenues, consider refinancing the loan. Payments can be lowered by either extending the length of the payment terms, lowering the interest rate, or both.

If one has multiple loans, debt consolidation can be another option, it combines multiple loans and replaces them with a new, single loan with more affordable payments.

Ignoring the financial Statements

Keeping good accounting records does not help the business unless it is reviewed regularly. Unfortunately, many business owners ignore this task and review financial statements only when they have

financial problems. Reviewing financial statements allows identifying potential problems beforehand.

Solution: Financial Statements must be reviewed as often as necessary. Minimum, once a week. Keep in mind that it is helpful only if the accounting system is up to date.

The following statements are recommended to be reviewed:

  • Payables aging
  • Receivables aging
  • Cash flow statement
  • Profit and loss
  • Balance sheet
  • Bank statements

Incorrect Sales Forecasting

In anticipation of greater sales, owners often ramp up their business investments.

They want to capitalize on the expected demand. If the expected demand never materializes, the business faces a financial loss.

Solution: Every business miss sales forecast at one time or another. However, there are ways to decrease the cash flow problems that often follow. They are:

  • Handle growth through outsourcing (or temp employees) at first.
  • Deploy conservative (rather than aggressive) growth plans
  • Initially, rent extra assets instead of owning.

Too much Bad Debt

Bad debt occurs when a product is sold, or a service is provided to a client who does not pay. Bad debt presents obvious h

arm to the cash flow and profitability.

Solution: The solution to this problem is to review the commercial credit of the client before extending the payment terms. Provide terms only to clients who have good credit and a solid payment record. Others should prepay until they have built a track record with the company. This strategy may cost some sales. However, it only costs us the clients who were deemed credit risks, to begin with.

The real Estate Industry has always been a highly cyclical industry, and developers are often prone to cash flow problems. Property development requires significant initial capital investment, as well as ongoing cash outflows for operations. Unless some or all of the development can be sold before construction, developers often run into cash flow problems before the development begins to sell off, particularly if the property market happens to soften during construction. Many property developers have been forced into bankruptcy because of negative cash flow for extended periods of time.

Any business that's undergoing rapid expansion can too run into cash flow problems. Business expansion generally involves higher labor costs as new employees are hired, higher rent for additional space, higher advertising costs, and more capital investment for new facilities, equipment, and so on. Having to maintain increased levels of inventory can also eat into excess cash.

Solving Cash flow problems

As a business owner, one needs to perform a cash flow analysis on a regular basis and use cash flow forecasting so that one can take the steps necessary to head off cash flow problems.

Many software accounting programs like

(Intuit QuickBooks, Xero, AccountEdge Pro, etc) have built-in reporting features that make cash flow analysis easy. This is the first step in cash flow management.

The second step of cash flow management is to develop and use strategies that will maintain adequate cash flow for the business. One of the most useful strategies for the business is to shorten the cash flow conversion period so that the business can bring in money faster. If the business is expanding, it may need one or more injections of cash during the growth phase.

Cash flow management keeps a track of cash flow & helps to spot trends and prepare for the future. It helps in predicting how much money will be available to the business in the future and how much it would need to cover debts, like paying employees and suppliers. The ultimate goal of cash flow management is to ensure that the business does not run into cash shortages. A business must not be overdue in payments to creditors. Similarly, no long-standing debtors should appear. The emergence of such cases is a signal for the cash flow manager to take charge. It pays to practice cash flow management often to make sure the business has enough money to keep running.

Lastly, it can be summarized as the process of monitoring, analyzing, and optimizing the net amount of cash receipts and cash expenses. Net cash flow is an important measure of financial health for any business