Cash flow in a business is the lifeblood that nourishes survival and growth. Knowing how to manage business cash flow Efficiency is not only a simple financial operation but also directly determines the ability to pay, investment opportunities and long-term stability. According to statistics from the Ministry of Planning and Investment, up to 70% of small and medium enterprises in Vietnam encounter difficulties or have to stop operating in the first 5 years, the core cause of which often comes from poor cash flow management.
In the volatile business context, how to control and optimize this cash flow, especially the cash outflow? This article by Bizzi will provide an in-depth look at the nature, role and how to manage business cash flow scientifically, helping you save time and operate according to standard procedures.
1. What is cash flow in business?
The key difference to understand: Cash flow is not profit. Profit is recorded on financial report based on the accrual basis of accounting, while cash flow is the actual amount of cash. A company can report large profits but still face bankruptcy if it does not have enough cash to pay its debts as they come due.
Cash flow in business (Cash Flow) is the actual movement of cash and cash equivalents into (inflow) and outflow from a business over a given period of time.
For accurate analysis, cash flow is made up of 5 core attributes:
- Source: Cash flow is classified into 3 main activities, clearly reflected on the cash flow statement:
- Cash flow from operations (CFO): The most important source of cash, generated from core operations such as sales and service provision. A positive and stable CFO is a sign of a healthy business.
- Cash flow from investing activities (CFI): Relating to the purchase, sale, and liquidation of long-term assets (machinery, buildings) and financial investments.
- Cash Flow from Financing Activities (CFF): Arising from capital transactions with owners and creditors (bank loans, stock issuance, dividend payments).
- Trend: Including cash inflow (thu) and cash outflow (cash). The difference between these two flows is the net cash flow. Tight control of cash outflows is key to maintaining positive net cash flow.
- Scale: Specific values of revenues and expenditures during the period.
- Time: The determinant of liquidity. Cash in early and cash out late is always the goal of every manager.
- Frequency: Cash flows are monitored periodically (monthly, quarterly, annually) to assess trends and management effectiveness.
2. The role of corporate cash flow management
How to manage business cash flow Efficiency directly determines the existence and development of the company.
- Preventing the risk of bankruptcy: A serious cash shortage, even if the business is profitable, can still lead to the inability to pay debts due to banks or suppliers, facing litigation and bankruptcy.
- Optimizing the cost of capital: Excess cash leads to waste, because money is not invested to generate profit. On the contrary, good control of expenditures helps businesses reduce borrowing pressure and optimize operations. business expenses.
- The basis for strategic decisions: A strong cash flow, achieved through effective revenue and expenditure management, allows businesses to confidently invest in expansion, research new products or take advantage of M&A opportunities in the market.
3. 5 Steps to planning and detailed ways to manage business cash flow
Step 1: Forecast cash inflow
Estimate all expected cash receipts, classified by three main sources:
- From business activities: Sales revenue, debt collection from customers.
- From investment activities: Proceeds from liquidation of assets, return of investment capital, dividends and profits.
- From sponsorship activities: Receive capital contributions from owners, revenue from issuing shares, bank loans.
Step 2: Forecast cash outflow
Accurately estimating expenses is a crucial step, and this is where cost management solutions come in. Key expenses include:
- For business: Paying suppliers, paying employee salaries, paying interest, paying taxes, operating costs… To forecast accurately, businesses need an effective system to Accounts Payable Management, ensuring all invoices are recorded and paid on time. Building a Internal spending rules Tight is the foundation for controlling cash outflows.
- For investment activities: Expenses for purchasing fixed assets and investing in other entities.
- For sponsorship activities: Pay principal debt, buy back treasury stock, pay dividends.
Step 3: Calculate net cash flow
Net cash flow is determined using a simple formula:
Net Cash Flow = Total Cash Inflow – Total Cash Outflow
A positive number indicates that cash inflows are greater than cash outflows and vice versa.
Step 4: Determine the ending cash balance
Combine net cash flow with beginning cash balance to forecast ending balance:
Ending balance = Beginning balance + Net cash flow during the period
Compare the expected ending balance with the safety stock level to determine the amount of surplus or shortage.
Step 5: Develop a solution to handle the difference
- If short of money: Accelerate debt collection, negotiate debt extensions with suppliers, and cut unnecessary costs. Applying technology to review and cut ineffective expenses is a strategic solution.
- If you have extra money: Plan to pay off debt early, make short-term financial investments (certificates of deposit), pay dividends to shareholders, or invest in new assets.
4. Common mistakes in business cash flow management
Many businesses, especially SMEs, often make fatal mistakes related to expense control:
- Equating profit with cash: The most classic mistake. High revenue, good profits but money still sitting in receivables will not help the business pay salaries or bills.
- No cash flow plan: Operating without forecasting is like “sailing without a compass”, leading to passivity in the face of events.
- Loose debt management: Letting customers owe you money for too long or not having a clear debt collection policy can clog up cash flow.
- No reserve fund: Lack of a cash cushion for emergencies (economic downturn, equipment failure) can put a business in a difficult position.
- Spending too much money when having money: Overspending on long-term investments or unnecessary expenses without a strict approval and control process, especially when processing electronic invoices from suppliers manually, lacking transparency.
5. Advanced principles in managing business cash flow
To optimize, businesses need to consider more complex factors, of which cost control is the focus:
- Seasonality analysis: Industries such as retail and tourism have strong seasonal cash flow fluctuations. Businesses need to accurately forecast this cycle to accumulate enough capital for the peak season and tighten cost management during low season using automated tools.
- Cash flow quality assessment: Positive cash flow is not always good. Cash flow from core operations (CFO) should be prioritized because it is sustainable, instead of extraordinary income from asset sales or large debt.
- Sensitivity Analysis: Assess the impact of external factors. For example, an importer's cash flow may decrease by 5-10% when the exchange rate increases by 1%, or interest expenses may increase when the central bank raises interest rates. Building a response scenario helps businesses be more proactive.
6. Tools and Software to support cash flow management
Choosing the right tools to automate and increase accuracy is how to manage business cash flow efficiency, especially cash flow:
- Spreadsheet (Excel, Google Sheets): Suitable for micro businesses. Advantages are free and flexible. Disadvantages are manual, error-prone when data is large, and inability to update in real time.
- Traditional accounting software: Software such as MISA, FAST… have the function of creating cash flow reports, but the data is often delayed due to dependence on the accounting closing period.
- Spend Management Automation Platform: Modern solutions like Bizzi focus on controlling cash outflows in real time. By automate payment process and Invoice processing input, direct integration with systems Accounting ERP, Bizzi provides accurate, real-time spending data. This gives managers a clear view of expenses, allowing them to make more reliable cash flow forecasts and make digital accounting comprehensive
7. Conclusion
How to manage business cash flow is not only a task of the accounting department but also a strategic capability of the entire organization. Methodical planning, strict control of revenue and expenditure, application of technology to automate cost management, and continuous analysis and evaluation will help businesses not only ensure solvency but also optimize the use of capital, creating a solid financial foundation for breakthrough and sustainable development.
Sustainable cash flow management requires discipline and the right tools. Discover how Bizzi automates invoice processing and integrates with financial reporting to give you real-time cash flow visibility.