6 Tips for effective cash flow management

Written by Staff Writer

Jan 18, 2021

By Ophelia Milton

Cash is king, and effective cash flow management is vital to the health and success of your business in 2021. In a report published by the Chartered Institute of Management Accountants, Sian Lloyd-Jones indicates that while profit, turnover and market share are important indicators of your business’s success, owners need to ensure that there is enough money in the bank to cover monthly bills, wage runs and loan payments. Lloyd-Jones, the former CEO of Finance Wales Investments Limited, states that cash flow is most effectively controlled within the day-to-day management of your business through important decisions made by owners and shareholders. How can you most effectively stay on top of your business’s cash flow in 2021?

 

  1. UNDERSTAND YOUR CASH FLOW CYCLE

Your cash flow cycle indicates the inflows and outflows of money within your business. Ideally, more money would flow into your business than that which flows out. Unfortunately, most often cash inflows tread behind cash outflows leaving your finances short. This financial shortage can be referred to as your ‘cash flow gap’ i.e. the time gap between your business’s ability to pay expenses and its receiving of payments. Owners need to monitor their business’s cash flow cycle and be able to take corrective action when necessary.

 

  1. SET UP A BUDGET

Budgets assist your business in predicting its cash inflows and outflows over a certain period. A comprehensive budget will allow you to identify potential cash flow time gaps in which your outflows may exceed your inflows when combined with the business’s cash reserves. In a journal article, published by Virtus Interpress, Augustine Aren and Athenia Sibindi of the University of South Africa advises that businesses use cash budgets, float and ageing schedules to control and monitor the inflow and outflow of cash. An effective and comprehensive budget can ensure that your business is ready for unexpected fluctuations in your cash flow cycle.

 

  1. HAVE CASH ON HAND

Aren and Sibindi advise that businesses hold onto additional cash for unexpected requirements, emergencies and precautionary purposes. Creating a target cash balance can be tricky. The opportunity costs of reserving excess monies could be high, especially under high interest rates. The scholars advise that businesses use a budget system to establish a target cash balance that involves a trade of analysis that covers all cash deficiencies and budget requirements and avoids an excessive cash balance.

 

  1. CREATE AND MAINTAIN A CASH CULTURE

Shortening your business’s cash flow time gap may require you to limit the amount of trade credit allowed to customers, especially customers with poor credit records. Insisting on cash payments for the majority of business transactions will ensure your business’s liquidity and limit the cost of bad debts.

 

  1. CLOSE YOUR CASH FLOW GAP

Effective cash flow management involves keeping a close eye on your business’s cash receipts and payments. Businesses should keep track of customer payment histories and collection processes in order to speed up their receivables. This should be done while attempting to lengthen your accounts payable period by adjusting your terms with creditors.

 

  1. STAY COVID-19 READY

A report, published by Deloitte Canada, advises that businesses prioritize cash flow management as an important part of the organization’s Covid-19 risk assessment and action planning in the coming period. The report illustrates that being prepared for the harsh effects of Covid-19 involves evaluating your business’s cash flow requirements, being prepared for various scenarios as well as assessing all potential risks to your suppliers and customer base.

 

The Covid-19 pandemic has had dramatic negative outcomes on the financial health of South African businesses. Now, more than ever, owners need to keep a close eye on their cash flow in order to ensure the health, success and scalability of their businesses.

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