Cash Flow Management

Cash Flow Management

Every business needs adequate liquid resources to maintain day to day cash flow. In order to run the business operations smoothly, the firm needs enough cash to pay wages & salaries as they fall due and to pay creditors. Maintaining adequate working capital is not just important in the short term but also in the long term in order to ensure the survival of the business. A firm must have adequate working capital, i.e. as much as needed by the firm - it should be neither excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations.

The basic process for managing cash is simple - try to maintain an adequate level of cash to meet current obligations and invest idle cash into earning assets. Follow the tips provided below to ensure a healthy cash flow.


Tips for Maintaining a Healthy Cash Flow


1.    Understand history of your cash flow
The first step for improving your cash flow is to understand the history of your cash flows. This requires scheduling cash inflows and outflows. Once you understand the history, you can take steps to cut cash outflows and increase collections.


2.    Check customers' credit histories
Decide the type of customer to whom you want to extend credit. Do you want to have a particular cut-off credit score? If you extend credit to customers with questionable credit histories or low credit scores, you may experience late payments or no payments, which will slow down your cash flow and increase your collection costs. If you have doubts about a customer's ability to pay, ask for an advance deposit.

3.    Keep track of your customers' payments
Keep accurate payments records by using a specialized accounting software program that will keep track of invoices raised and payments made. If customers are late with their payments, it could cause a cash flow bottleneck for you. Accurate recordkeeping will help solve this problem.

4.    Set appropriate credit terms and offer a cash discount
Make sure your customers understand how long they have to pay their bill. In order to speed up the cash they pay, you might want to offer a cash discount to any customer that pays in a short period of time or to a customer who pays cash.

5.    Take advantage of discounts offered by suppliers
Pay your bills on time and take advantage of any cash discounts your suppliers offer you. However, hold onto your cash as long as possible. Don’t pay bills weeks earlier than they are due. Your company can use that cash balance, rather than letting your supplier use your company’s cash.

6.    Cut back on spending wherever possible
Your purchasing practices should also consider a mixed approach. For example, why do you have to buy everything new? Purchasing used items or renting can save a lot of cash flow. You may want to purchase in minimum quantities, especially if your cash flow is tight. Cut back on unnecessary spending until it is less than your revenue on a month-by-month basis. This cash saving could be helpful during times of emergency.

7.    Get rid of excess inventory
Do not hold excess inventory, especially for a long time. If you are, mark it down and sell it. Storing it is costing you money and selling it at a lower price is better than not selling it at all. The longer you hold on to obsolete inventory, the less likely it is to sell.


Working Capital and Ratio Analysis

Ratio Analysis is one of the important techniques that can be used to check the efficiency with which working capital is being managed by a firm. The most important ratios for working capital management are: current ratio and quick ratio. A current ratio in excess of 2:1 or a quick ratio in excess of 1:1 may indicate over-investment in working capital.

Turnover periods can also indicate any problems in the working capital situation. Excessive turnover periods for stocks & debtors, or a short period of credit taken from supplies, might indicate that the volume of stocks of debtors is unnecessarily high or the volume of creditors too low.




  • Rosemary Peavler, Guide
  • Randika Lalith Abeysinghe,
  • Matt H. Evans,