Cash flow is the lifeblood of a business, especially small to medium-sized enterprises. Some studies suggest that small businesses cite cash flow as one of their top 5 challenges. Hence, it is crucial to understand what cash flow is and how it can be managed.
This article will walk you through cash flow management and also detail how strong accounts payable software can help you plan better. Let’s get started!
Table of Contents
What is cash flow?
Cash flow refers to the amount of cash coming in and going out of your business. In other words, the cash movement within your company is known as cash flow.
Any cash that comes in is called a cash inflow, whereas any cash that goes out is known as a cash outflow. When the cash inflow is more than the cash outflow, there is a net cash inflow which is called positive cash flow and vice versa.
What is cash flow management?
Cash flow management is the process of maintaining your business’s cash flows by tracking, analysing, monitoring and optimising the cash that comes in and goes out of the business. In simple words, it analyses the net cash flows by deducting expenses from the total receipts.
Managing your business cash flow is important as it helps you ensure that there is enough cash to carry out your day-to-day operations and cover expenses like debt, salaries and invoices. It also helps you identify finance-related problems and solve them as and when they occur.
Example of cash flows
Cash flows can be either positive or negative. When the income is more than the expenses, it is called a positive cash flow.
Similarly, when the expenses are more than the income, it is known as a negative cash flow. Here’s an example to help you understand it better.
Positive cash flow
The following is a cash flow statement of a small business that sells car equipment online. It shows the incoming cash flow and outgoing cash flow.
| Operations | |
| Cash receipts from customers | Rs.80,000 |
| Cash paid to external sources for customer service | Rs.50,000 (this money is paid by the business so let’s consider it negative for understanding)
-Rs.50,000 |
| Investing | |
| Cash receipts from the sale of a vehicle | Rs.10,000 |
| Cash paid for product maintenance/equipment | -Rs.15,000 |
| Financing | |
| Cash paid for loan payment | -Rs. 20,000 |
| Net change in Cash | Rs. (80,000 + (-50,000) + 10,000+ (-15000) + (-20,000)
= Rs. 5000 |
As you can conclude, there has been a net increase in cash (Rs.5000) and so this is positive cash flow because the business brought more income than it paid expenses.
Negative cash flow
Similar to the above table and example, if we change the amount of ‘cash receipts from customers’ in the first row to Rs. 70,000 the net change in cash will come out to be (-Rs. 5000) i.e., there will be a net decrease in cash. This will be called negative cash flow because the business paid more expenses than it brought income.
Now that we’re clear with the basics, let’s have a look at why cash flow management is so important for your business.
Why is cash flow management important?
Cash flow management is crucial to the success of any company. If your expenses are higher than your income for a prolonged period, your business will suffer a severe cash crunch.
Here are some of the reasons why cash flow management is important:
- Helps business continuity– An adequate amount of cash is a necessity for every business as it helps you carry out the day-to-day activities, pay vendor invoices, and other small expenses. Having negative cash flows for a prolonged duration can not just have a negative impact but can even shut down your business. This is especially true for small businesses, which need more capital to cover the lack of positive cash flows.
- Establish investor trust– Good cash flows not only help you stay in business but also help establish trust among investors. Positive cash flows ensure that their money is in safe hands and the company’s future is stable.
- Proper utilisation of funds– Proper management of cash flows also helps ensure that all the funds are utilised efficiently. The management can constantly review the cash management policy and make amends accordingly.
- Cut down on unnecessary expenses– Cash flow management involves the time-to-time review of the cash flows. If you have negative cash flows, you can review your expenses and try to cut down on unnecessary ones to improve your cash flow.
- Facilitates decision-making– The cash flow situation of your company also helps you make better decisions. For example, if you can maintain positive cash flows and high liquidity, you can extend more credit to your suppliers and vice versa.
How to forecast & manage cash flow?
Here are a few steps that can help you forecast and manage your cash flows:
- Estimate your revenue and sales– Estimate all your upcoming incomes and expenses. Also, decide the period for which you want to make the estimate.
- Set a budget– Depending on your estimated income and expenses, decide your business’s budget. This will help you make better financial decisions.
- Keep records– It is crucial to keep a record of all your transactions as this helps you track the company’s performance and compare it with the data from previous years.
- Review your spending regularly– Review your spending regularly to keep a check on your expenses. This will help you cut your costs and reduce unnecessary expenses.
- Increase your sources of income– Reducing your expenses might not be enough to maintain a healthy cash flow. Also, look out for ways to increase your revenue.
How strong and agile accounts payable software like RazorpayX helps
RazorpayX reimagines money flows and simplifies vendor management, invoices, and payments for businesses.
Explore RazorpayX Vendor Payments
Here’s how RazorpayX Vendor Payments can help you:
- Estimate future cashflow needs – Our carefully crafted product lets you estimate your future cashflow needs with extensive invoice management and real-time dashboard tracking.
- Invoice scheduling- RazorpayX Vendor Payments also lets you maintain cash flow through its feature of automated scheduling of invoices on due dates.
- Easy sourcing of invoices– RazorpayX allows you to add invoices to the software in multiple ways. This helps you track your vendor payments.
- Auto-capture invoice details– It saves you from doing manual data entry by auto-capturing the invoice details and saves you from paying more than once, thus streamlining your cash flow management.
- Automatic deduction of TDS– Add the TDS category of the vendors, and RazorpayX auto-calculates the TDS amount and deducts the TDS for every invoice.
- Quick and seamless reconciliation– It provides you with seamless reconciliation. This helps you track your cash flows and reduce your expenses.
While cash flow management is crucial to the success of your business, manual cash flow management can be stressful. If you are also struggling with managing your cash flow and feel like it’s too much work, RazorpayX VendorPayments is the perfect solution for your needs.
90% of India’s tech startups are on RazorpayX because they know time is money and RazorpayX lets you save both with smart automation.
