Why Managing Cash Flow is Key to Business Success

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With rising interest rates, an uncertain economic future and clients knocking on the door for extended payment terms, cashflow is becoming the hottest topic in business for the foreseeable future.

Azure Group often write about cashflow because we consider it such an important topic. Now more than ever, it’s vital you understand why managing your cash is so crucial, and why investing in effective cashflow management will be your business lifesaver.



What is cash flow management

Cash is the most important resource for a business as it drives all business operations. Without generating enough cash and having cash-on-hand in due time, a business can’t function.

Cash flow management is the process of tracking your business’ cash inflows and outflows. Cash is what powers your business on its road to success. It’s the fuel that dictates whether your business can function. And, even when all your other business components look healthy, if you neglect to manage your fuel levels, your chances of making it to the end of that road are resting on sheer luck!

Cash flow management allows you to determine the net cash position of your business, by taking into consideration information from both the balance sheet and profit and loss statement. It therefore allows for an understanding of your business’ overall sustainability, which subsequently helps to accurately inform future strategic decisions.

Cash flow statements present the source of cash inflows and destination of cash outflows in three categories, namely; operating, investing, and financing. This also helps to determine the sustainability of your business as it illustrates whether your current cash was derived from an unsustainable source, such as a loan, or a sustainable source, such as operating activities. Without a critical understanding of the source of cash, it is impossible to make advised strategical decisions for your business.



Benefits of cash flow management 


1. Pay expenses on time

Effective cash flow management allows businesses to track ALL actual expenses, so that you can time your cash flow. By reviewing your business’ cash inflows and outflows, you can plan business activities according to your actual cash-on-hand at a given time, so that you have enough funds to meet payment and loan deadlines. Since cash flow statements illustrate the entire scope of business activities and current and actual expenses, you can identify cash deficits prior to due payments.

2. Determine liquidity of your business 

The ease with which a business can meet financial obligations with the liquid assets available to them, or in other words, a business’s ability to pay off debts as they come due, lies in the effectiveness of their cash flow management. Bankruptcy is often caused because of poor cash management, underpinning the importance of predicting shortfalls, and allowing time to prepare for these by generating funds or reducing overhead costs. Even if your business is performing well from a profit perspective, this figure may include money that you are owed, but haven’t yet received, meaning you mightn’t have cash available when it is required to pay expenses.

Related: How Business Owners Can Avoid A Cashflow Crisis

3. Plan business growth

Understanding your business’ overall financial position will assist your business in identifying when it is feasible to invest money in business growth, so that you can confidentiality strategise key business decisions and forecast shortfalls and surpluses



Outsourcing cash flow management 

At Azure Group, we believe rigorous cash management is essential to business growth. Our priority is to ensure cash is coming in and going out on time by setting up a system to monitor and then increase your working capital. For your business to make timely critical business decisions, we utilise a three-way business model to integrate your cash flow with your financial report and budget and forecasting tools – enabling for an in-depth and accurate overview of your business’ financial position.

Azure Group’s team have a wealth of knowledge and experience when it comes to providing a detailed “what if” analysis and solutions to address shortfalls and surpluses if or when they occur. Visit our website to learn more.


Have you Have you noticed our #FridayExpertTips... here's one that relates to #Accounting

“Good cashflow forecasting gets more accurate over time: the most important things to do, like most things in life, is to start.”

 

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About Author

Azure Group
Azure Group

Azure Group is the leading Chartered Accounting, Business Advisory and Strategic Advisory firm supporting the growth & success of fast growing entrepreneurial businesses.

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