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Cash Flow Management

What is cash flow management?

It is often said that cash is king. That is true to an extent — cash flow is what keeps it in power. Cash flow management is the process of monitoring, analyzing, and controlling a company’s cash inflows and outflows. The ultimate goal is to ensure liquidity to meet financial obligations and support business operations.

Cash flow is different from profit, which accounting accruals can influence. Instead, cash flow is the actual movement of money in and out of a business, making it a vital indicator of financial health.

Key components of cash flow management.

1. Cash-flow forecasting.

Cash-flow forecasting is the process of predicting future cash inflows and outflows over specific time periods (for example, weekly, monthly, or quarterly).

Accurate forecasts help finance professionals anticipate potential shortfalls and surpluses, so they can make the necessary adjustments.

2. Working Capital Management.

Working capital management is the strategic management of short-term assets and liabilities to ensure sufficient funds for an organization’s operations.

Key elements of working capital management include:

  • Accounts receivable: Making sure invoice collection cycles result in adequate cash inflows.
  • Accounts payable: Negotiating favorable payment terms with suppliers.
  • Inventory management: Balancing inventory levels to meet demand while minimizing carrying costs.

3. Cash-flow analysis.

Cash-flow analysis is the process of regularly analyzing cash flow statements to identify trends, variances from forecasts, and areas for improvement. When you compare cash flow to profit, you can often spot discrepancies and potential issues.

4. Cash conversion cycle (CCC).

The cash flow conversion cycle metric measures the time it takes to convert inventory into cash. A shorter CCC indicates faster cash generation, improving liquidity.

5. Expense control.

Scrutinizing operating expenses to identify opportunities for cost reduction and efficiency gains, freeing up cash for other purposes.

Why cash flow management is important.

Cash flow management ensures a company has the funds to remain solvent. By strategically managing cash, finance teams can make informed decisions about investments, debt, and overall financial health.

Cash flow management is essential in the following areas:

  • Solvency: Adequate cash flow prevents defaults on debt payments, payroll, and other critical obligations.
  • Profitability: While profits drive long-term value, cash flow is essential for covering short-term expenses. Keep in mind that a profitable company with poor cash flow management can still fail.
  • Investment and growth: Positive cash flow supports strategic investments in equipment, expansion, acquisitions, or R&D — all vital elements for company growth.
  • Financial flexibility: Healthy cash reserves act as a buffer against unexpected events, economic downturns, or changes in market conditions.
  • Investor and lender confidence: Robust cash flow management shows strong financial discipline. This can improve a company’s creditworthiness and attract favorable financing terms.

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Best practices for effective cash flow management.

  • Centralized cash visibility: Having real-time visibility into cash balances across all bank accounts and business units supports more effective cash flow management.
  • Automation: Automating invoice processing, payments, and bank reconciliations reduces manual errors and saves time.
  • Scenario planning: Modeling different cash flow scenarios based on varying sales projections or economic conditions helps to proactively plan for change.
  • Communication and collaboration: Open communication between finance, sales, and operations helps align cash flow goals.
  • Data-driven decision-making: Cash-flow analytics can drive strategic spending, capital allocation, and debt management decisions.

Challenges and considerations in cash flow management.

Cash flow management isn’t always a smooth process. Finance teams have to contend with challenges like these:

  • Seasonality: You should account for cash flow fluctuations due to seasonal variations in sales or expenses.
  • Unexpected expenses: Contingency planning is crucial for dealing with unforeseen events (as we all learned at the onset of the COVID-19 pandemic when workforces rapidly shifted to remote work).
  • Economic volatility: External economic factors out of our control can significantly impact cash flow.
  • Growth: Rapid growth can strain cash flow as investments may outpace incoming revenue.

How Airbase helps with cash flow management.

Airbase’s automated P2P platform supports cash management in several ways.

1. Real-time spend visibility.

Airbase’s real-time reporting and GL sync provide an up-to-date view and real-time visibility of company-wide spending. This helps avoid cash flow surprises.

2. Centralized cash flow data.

When all transactions (card spend, bill payments, reimbursements) flow into a single platform, cash flow forecasting and analysis don’t have to rely on disjointed systems and manual data aggregation.

3. Controlled spending.

Features like pre-approvals and the ability to limit amounts on corporate cards give control over cash outflows. This prevents unbudgeted or out-of-policy spending that can strain cash flow.

4. Optimized accounts payable (AP).

Airbase automates invoice processing, approvals, and payments to optimize accounts payable. This accelerates vendor payments to capture early payment discounts, while also enabling scheduled payments to optimize cash runway.

5. Reporting and analytics.

Airbase’s customizable reporting and dashboards provide granular insights into spending patterns across departments, projects, or vendors. This helps identify areas where cash flow can be improved and allows for data-driven budget adjustments.

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