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Strategies to maintain a positive cash flow with cash flow management tools


Cash flow management is critical to the profitability of any organization. Learn how one can steer their company on the proper path by accurately forecasting and managing cash flow with appropriate strategies.

Contents

Chapter 01

Why does having an effective cash flow management strategy matter?

Chapter 02

Strategies to maintain a positive cash flow

Chapter 03

Benefits of cash flow management tools
Chapter 01

Why does having an effective cash flow management strategy matter?


Cash flow management issues are the major reason for the failure of small businesses. Maintaining or improving the cash flow is critical to keeping the company running while waiting for accounts receivable to receive and process customer payments.

At its core, cash flow management is about making the best use of the company’s working capital by:

  • Reducing the amount of cash on hand
  • Balancing cash inflows and cash outflows wholly and accurately
  • Ensuring that all cash is spent to maximize ROI and value creation (i.e., optimizing the working capital turnover ratio)
  • Maintaining adequate working capital to cover the company’s financial obligations, with enough left over to cover unexpected expenses and capitalize on investment opportunities. This necessitates balancing business liquidity against opportunity cost.

Why is cash flow management important to small and mid-size businesses?

82% of businesses fail due to poor cash flow management/poor understanding of cash flow. Although it may appear challenging, cash flow management and prioritizing effective cash flow management have substantial advantages, such as:

Importance of cash flow management

  • Pay off short-term debts: Most companies have some debt, and strong cash flow is critical to meeting repayments. A healthy cash flow management guarantees that the company can pay its suppliers and employees on schedule. As a result, cash flow is essential to sustaining positive business relationships.
  • Take advantage of new opportunities: Positive cash flow is essential when it’s time to develop the business or invest in new ventures. Cash flow management is critical in establishing and maintaining a company’s financial stability.The way a company manages cash flow has the potential to impact the company’s fate. Companies that fail to handle their finances appropriately will not be able to build their businesses as envisioned. Cash management services help with continuous investing in operations, enabling the company to scale with new opportunities as soon as possible.
  • Access financing when required: While cash flow management might assist businesses in avoidingavoiding overborrowing, the business may still require a business loan at times.A cash management tool predicts when borrowing is required and how much money needs to be borrowed at a certain period. Furthermore, it indicates if businesses can meet all the repayments on time to avoid debts and also simplifies obtaining better loan arrangements, such as lower interest rates.
  • Improved planning and decision-making: Successful cash flow management necessitates continuous monitoring and analysis of key performance metrics, including cash flow.By examining cash flows daily with a cash flow management tool, treasury can automatically identify the cash balance in the company account. Assessing this cash balance early aids in determining whether the organization’s financial status is stable, excess, or deficit. This enables the treasury to make informed and sound decisions.

How is negative cash flow bad for companies?

A negative cash flow indicates that the company spends more money than it gets. If uncontrolled or ignored, negative cash flow can make the firm unprofitable and suggest that the management is inefficient at using the company’s assets to generate revenue.

How can a company recover from a negative cash flow?

Four ways to recover from negative cash flow are as follows:

Ways to recover from negative cash flow

  • Analyze the cash flow: Ideally, one should analyze cash flow twice a month to begin recovery-related operations if a negative cash flow is discovered. Cash flow forecasting can also help determine if it is possible to balance the negative cash flow in the near future or whether users need to do anything else to manage the cash flow.
  • Be ready for the worst: Negative cash flow indicates that the small business’s situation may deteriorate further. Establishing an emergency reserve to keep additional cash to manage cash flow is recommended to overcome a negative cash flow situation.

    If you already have a sufficient emergency reserve, use it to handle the negative cash flow. However, keeping an emergency fund and storing money can come in handy during unexpected occasions.

  • Examine and reduce expenses: Reviewing expenses can help avoid a negative cash flow by revealing regular and avoidable expenses. Consider alternatives to reduce unnecessary spending by outsourcing certain firm areas or discontinuing a particular activity.

    Companies should regularly conduct this assessment to identify overspending, cut back to save money, and put the cash flow statement back into balance.

  • Effectively manage the receivables: The cornerstone of cash inflow is
    accounts receivable. Delays in tracking account receivables are undesirable since they can result in negative cash flow. This is because if companies don’t receive the cash inflow on time, it’ll financially harm the company. Another strategy to avoid negative cash flow is conducting regular payment performance analyses using cash flow management tools.
Chapter 02

Strategies to maintain a positive cash flow


A positive cash flow is essential for financial health. A treasurer should implement these cash flow management tactics to manage working capital and obtain a competitive edge effectively.

Strategies to maintain a positive cash flow

  • Maintain detailed financial records: To maintain a good cash flow, businesses should keep accurate records of the inflow and outflow of capital. The profit and loss statement data does not give a complete picture of the company’s performance. Detailed records determine the business’s cash flow—a critical indicator of its health. A software solution, such as automated cash management services, assists companies in staying on top of their financial performance.

    The platform offers complete assessments of corporate performance by standardizing data from several platforms. The application, among other things, allows users to generate customized data such as revenue and sales by product.

    A high level of visibility into company operations is advantageous. Automation gathers transaction-level data from various sources, including banks and ERP. It also allows for the more accurate study of cash flows over a wide range of cash flow categories, geographies, business units, and currencies. This level of detail helps form a more precise cash forecast. Understanding how money goes through the business gives it a positive cash flow to expand and boost profits.

  • Keep cash flowing: A company can shorten its time to collect receivables to enhance the monthly cash flow. Another way to boost cash flow is to incentivize repayment. Customers that pay sooner than the billing cycle generally requires may be eligible for discounts or loyalty awards. This may affect the profit margins. However, it may help the company with its cash flow management effectively.
  • Maintain cash flow control: A positive cash flow is essential to a company’s success. Maintaining detailed financial records is essential for tracking how cash flows through the organization. This understanding will assist companies in structuring the organization to generate a positive cash flow.
  • Borrow money ahead of time: The ideal time to address a cash flow issue is before it occurs. If the company is doing well or is in the early stages of production, now is the time to borrow money. One can avoid rejection of funding by getting a business line of credit while the credit score is good. This will also offer resources to fall back on if you run into growing pains when launching a firm. Small businesses, particularly those affected by seasonality, can benefit from a business line of credit.
  • Utilize technology or cash management tools: The point of running a business is ensuring your revenues exceed your expenses and generate a profit. Managing cash flow is critical to running a profitable business long term.

    The right cash flow management software and business tactics can significantly impact the organization’s success. They allow focusing on running your business rather than worrying about cash flow. Cash flow management software can also streamline your business processes and increase efficiency.

  • Make cash projections frequently: Companies can generate better, more accurate, and up-to-date future cash flow estimates by regularly monitoring critical cash flow data or variables. This keeps the organization out of financial difficulties. A company must follow these things to improve cash flow projections:
    • Create a detailed and precise cash flow forecast.
    • Consider past numbers, such as customer payment histories, industry norms, averages, trends, and current economic and business situations while estimating revenues and expenses for a specific period.
    • Forecast monthly cash inflows and outflows over the term.
    • Compare and amend the budget based on actual monthly performance as the budget progresses.
  • Closely monitor the cash flow metrics and KPIs: Cash flow metrics are measurements of data from financial statements. On the other hand, KPIs provide more context and meaning to the metrics. For example, while viewing a net income metric is helpful, it becomes significantly more meaningful when other information, such as performance over time or how assets relate to obligations, is factored in.

    Cash flow key performance indicators (KPIs) are financial measurements that influence management and stakeholder decision-making. Everyone involved in treasury management should have rapid and easy access to these measurements.

  • Maintain control over financial reporting: With having control over financial reporting, the company can:
    • Keep an eye on the company’s financial health, which is especially critical during uncertainty and volatility.
    • Regularly pay close attention to the profit and loss account (also known as an income statement) to ensure that companies have produced a reasonable profit over a specific period.
    • Keep a watch on the cash flow statement (inflow and outflow), which reveals the company’s short-term viability. Maintain a close check on the balance sheet to ensure that company assets and liabilities are correct, detailed, itemized, and balanced. Include stock overview, asset registry, aging creditor/debtor, and VAT reports.
    • Learn how to apply for loans and investments by gathering the necessary information.
Chapter 03

Benefits of cash flow management tools


Cash flow management is critical to the success of any business. Positive cash flow indicates a thriving business but is also vital to investors.

What are the features to look for in a cash flow management software?

Four features to look for in a cash flow management software system are:

  • Dashboard for increased cash flow visibility: Connecting to all bank accounts, loans, and superannuation accounts quickly provides an overall financial picture. A cash management system tracks inflows and withdrawals and makes data conveniently accessible.
  • Categorization of expenses: Categorizing expenses aids in the firm’s organization and budgeting and identifying which expenses can be deducted from taxable income when paying taxes. Managers and treasury teams can modify processes and policies using cash flow management software. Furthermore, all payment request data is securely maintained in a unified cloud, making it simple for treasury staff to preserve correct records and rapidly retrieve them.
  • Ease of making and reconciling payments: Payment reconciliation is a bookkeeping procedure that compares internal financial records against bank statements to ensure proper accounting. Cash flow management tools automatically match cash transaction data from daily/weekly/monthly bank statements with those recorded in expense tracking.
  • Improved inter-company lending: Analysts may be unable to respond to consumers on time due to a lack of adequate record management. Cash management services automate the collection of intercompany activities, the tracking of balances, and the recording of interest across all mirrored and notional bank accounts.
  • Monitoring the budget and financial flow: The software assists in forecasting a company’s cash flow over a specific period. This could be handy for keeping track of a weekly, monthly, quarterly, or annual budget. The budget establishes whether the company has enough cash to continue functioning for the period stated.

Why use cash flow management tools?

  • Business professionals spend a significant amount of time gathering data and preparing reports. This is why treasurers, finance professionals, and accounting professionals benefit from adopting automated cash flow management software.
  • Automated cash flow management tools can assist reduce the time it takes to collect, sort, and analyze cash data.
  • The more accurate and up-to-date the cash flow statistics, the more informed the company’s financial decisions will be. One can ensure an accurate and up-to-date view of how much cash is going into and out of the organization by using cash management services.
  • The better the cash flow management, the better overall financial judgments. Knowing how much money is available can make or break a firm. It also allows for judgments that will result in more significant revenue and a better plan.
  • Saving time and money is always high on a business’s priority list. Integrating cash flow management software is a simple approach to saving employee time by automating the activities involved in cash flow management.
Chapter 01

Why does having an effective cash flow management strategy matter?


Cash flow management issues are the major reason for the failure of small businesses. Maintaining or improving the cash flow is critical to keeping the company running while waiting for accounts receivable to receive and process customer payments.

At its core, cash flow management is about making the best use of the company’s working capital by:

  • Reducing the amount of cash on hand
  • Balancing cash inflows and cash outflows wholly and accurately
  • Ensuring that all cash is spent to maximize ROI and value creation (i.e., optimizing the working capital turnover ratio)
  • Maintaining adequate working capital to cover the company’s financial obligations, with enough left over to cover unexpected expenses and capitalize on investment opportunities. This necessitates balancing business liquidity against opportunity cost.

Why is cash flow management important to small and mid-size businesses?

82% of businesses fail due to poor cash flow management/poor understanding of cash flow. Although it may appear challenging, cash flow management and prioritizing effective cash flow management have substantial advantages, such as:

Importance of cash flow management

  • Pay off short-term debts: Most companies have some debt, and strong cash flow is critical to meeting repayments. A healthy cash flow management guarantees that the company can pay its suppliers and employees on schedule. As a result, cash flow is essential to sustaining positive business relationships.
  • Take advantage of new opportunities: Positive cash flow is essential when it’s time to develop the business or invest in new ventures. Cash flow management is critical in establishing and maintaining a company’s financial stability.The way a company manages cash flow has the potential to impact the company’s fate. Companies that fail to handle their finances appropriately will not be able to build their businesses as envisioned. Cash management services help with continuous investing in operations, enabling the company to scale with new opportunities as soon as possible.
  • Access financing when required: While cash flow management might assist businesses in avoidingavoiding overborrowing, the business may still require a business loan at times.A cash management tool predicts when borrowing is required and how much money needs to be borrowed at a certain period. Furthermore, it indicates if businesses can meet all the repayments on time to avoid debts and also simplifies obtaining better loan arrangements, such as lower interest rates.
  • Improved planning and decision-making: Successful cash flow management necessitates continuous monitoring and analysis of key performance metrics, including cash flow.By examining cash flows daily with a cash flow management tool, treasury can automatically identify the cash balance in the company account. Assessing this cash balance early aids in determining whether the organization’s financial status is stable, excess, or deficit. This enables the treasury to make informed and sound decisions.

How is negative cash flow bad for companies?

A negative cash flow indicates that the company spends more money than it gets. If uncontrolled or ignored, negative cash flow can make the firm unprofitable and suggest that the management is inefficient at using the company’s assets to generate revenue.

How can a company recover from a negative cash flow?

Four ways to recover from negative cash flow are as follows:

Ways to recover from negative cash flow

  • Analyze the cash flow: Ideally, one should analyze cash flow twice a month to begin recovery-related operations if a negative cash flow is discovered. Cash flow forecasting can also help determine if it is possible to balance the negative cash flow in the near future or whether users need to do anything else to manage the cash flow.
  • Be ready for the worst: Negative cash flow indicates that the small business’s situation may deteriorate further. Establishing an emergency reserve to keep additional cash to manage cash flow is recommended to overcome a negative cash flow situation.

    If you already have a sufficient emergency reserve, use it to handle the negative cash flow. However, keeping an emergency fund and storing money can come in handy during unexpected occasions.

  • Examine and reduce expenses: Reviewing expenses can help avoid a negative cash flow by revealing regular and avoidable expenses. Consider alternatives to reduce unnecessary spending by outsourcing certain firm areas or discontinuing a particular activity.

    Companies should regularly conduct this assessment to identify overspending, cut back to save money, and put the cash flow statement back into balance.

  • Effectively manage the receivables: The cornerstone of cash inflow is
    accounts receivable. Delays in tracking account receivables are undesirable since they can result in negative cash flow. This is because if companies don’t receive the cash inflow on time, it’ll financially harm the company. Another strategy to avoid negative cash flow is conducting regular payment performance analyses using cash flow management tools.

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The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.