Effective cash flow management will directly affect the existence and development of a business. In the article below, Bizzi will provide you with useful information on the principles and plans of proper cash flow management.
1. What is cash flow management?
Cash flow management is an enterprise's planning, implementation of activities and evaluation, in order to regulate the movement of cash flow in the enterprise, with the aim of maximizing the value that the business receives. get.
Cash flow management will help businesses proactively grasp the financial situation, as well as the efficiency of using financial resources of the business. That will be the basis for businesses to develop plans to develop and expand their business scale. It can be said that cash flow management helps ensure the financial health of the business, deciding the survival of the business.
2. The role of cash flow management in the business
Effective cash flow management is a necessary requirement, directly determining the survival of an entire business.
A serious cash shortage, for example, a debt is due to a bank or supplier but the business does not have cash ready to pay, the business can be sued and ordered to pay. required to declare bankruptcy, regardless of the most recent financial statements of a profitable business.
On the contrary, the excess of cash in the capital of the business will lead to the fact that cash is not used efficiently and at the right time, leading to waste while the business has to borrow capital from banks or credit funds with interest. high capacity. This will again show weakness in corporate financial management.
Therefore, it is necessary to have a plan to control the movement of cash in and outace in the operation process to ensure the balance and match between cash inflows and outflows for the operation of the business.
3. Principles of management planning physical efficient cash flow
3.1 Cash flow planning
Any job, to achieve good results, the condition is to have a clear plan. The same is true of the use of money, in order for the financial resources in the business to be used in the most optimal way, the business needs to make a monthly or quarterly cash flow plan. The plan is also the basis for businesses to check and evaluate the effectiveness of using money. From there, the correct cash flow management measures are given. Therefore, one of the principles to effectively manage cash flow in the business is to build a clear cash flow plan.
3.2. Speed up the money cycle
To do this, one of the measures is that businesses have to deal with inventory, so that they can avoid stagnant cash. Reducing inventory also helps businesses save labor and warehousing costs, contributing to more efficient use of money.
3.3. Control accounts receivable and payable
Receivables are the capital that the business is being misappropriated by other parties. Therefore, if receivables are not well managed, the business will easily fall into a situation of losing money, partially hindering the business' spending plan. This will also affect the flow of cash in the business. For that reason, one of the requirements to ensure effective cash flow management is to first control receivables.
In addition to receivables, payables are also an item that businesses need to pay attention to. Liabilities will be an indicator reflecting a part of the cash outflow of the business. If the debt is too high, it means that the cash outflow is blocked, which means that the cash flow in the business is stuck. Therefore, in order to ensure the continuity of cash flow, the enterprise must manage its liabilities well.
3.4. Use tools to help forecast cash flow accurately
Cash flow forecasting will help control and proactively balance cash inflows and outflows, limiting the shortage or idleness of cash, helping the cash source to be used most effectively.
Cash flow forecasting has never been easy, and biases often arise. And for this work to get the most accurate results, businesses need to use support tools. Supporting tools will help to produce results after taking into account the factors that can affect the operation of cash flow.
4. Business cash flow planning method
Step 1: Forecast cash inflow
For the convenience of forecasting and planning, one can divide the cash inflows of the business into 3 types:
– Cash inflow from operating activities: This cash flow is mainly received from the main revenue-generating activities of the business such as sales proceeds from providing goods and services to customers, debt collection. receivable from customers…
The basis for forecasting business cash flow is usually based on the evolution of sales rules, payment methods and time of payment between buyers and businesses, credit policy, payment discount policy. Early collection of customer's money.
– Cash inflows from investing activities: Including cash withdrawals from investments, profits from investments in other entities, proceeds from the transfer, sale, and liquidation of fixed assets , money recovered from loans, money recovered from investment to contribute capital to other entities.
The basis of this cash flow forecast is from the expected liquidation of fixed assets, the policy of recovering financial investment capital.
– Cash inflow from investing activitiesFinance: Including money contributed by the owners in cash, money raised from borrowing capital, issuing shares.
The basis for this cash flow forecast is the ability to borrow new debt, the strategy of issuing securities to raise capital.
Step 2: Predict cash outflow
Cash outflows include all cash outflows arising from a business's operations during a period. We can divide it into 3 categories:
- Cash outflow from business activities: Including cash expenditures for the business's main revenue-generating activities such as payments to suppliers of materials and services, payments to employees, payments to the state budget for financial obligations, expenditures for marketing, advertising and sales of products, expenditures related to business management, interest payments on business loans, etc.
The basis for forecasting cash outflow from business activities is based on the law of purchasing and paying debts, estimates of salary fund, insurance, loan interest and expected payable tax. In addition, it is necessary to base on inventory reserve policies, credit purchasing policies, etc.
– Cash outflow from investing activities: Including money spent on the construction and purchase of fixed assets, money invested outside the enterprise (money invested to contribute capital to other units, money for get a loan…
The basis for forecasting this cash flow comes from the need to invest in fixed assets for business operations, investment strategies to contribute capital out, strategies to buy stocks and bonds...
– Cash outflow from financial activities: Includes principal repayments until the payment period, payments for financial leases, and interest paid to investors who invest capital in the business such as dividends, money buy back shares of the company that has issued…
The basis for forecasting cash outflows from financial activities is derived from the need to repay debt according to current credit contracts, from the profit distribution policy of the enterprise.
Step 3: Calculate the net cash flow of the business
Net cash flow is the difference between cash inflows and cash outflows of the business during the same period.
Step 4: Determine the ending balance and the excess or deficiency
Combined with the opening balance, we can determine the ending balance by the formula:
Closing balance = Beginning balance + Net cash flow for the period
From there, compare with the required cash balance, determine the excess or deficit of capital by the difference between the ending amounts and the required cash balance.
Step 5: Provide appropriate solutions to handle the excess or lack of money
In case of cash shortage, it is necessary to consider and consider using appropriate measures to reach a balance in cash flow such as considering the ability to borrow capital, increasing the ability to collect debts and tightening expenses. spending in cash… On that basis, consider a new balance of cash receipts and expenditures.
In case of excess capital in cash, it is necessary to actively consider the possibility of using investment money appropriately to increase the profit of the currency.
Of course, when taking measures to handle excess or short of cash flows, it is necessary to recalculate the cash flows of the cash flow forecast because changing the amount of a certain month will have an effect on the excess amount in the cash flow forecast. next periods.
Therefore, when the forecast is not done once to complete the forecast, but after the initial forecast is calculated, we need to make suggestions on measures to handle the excess and deficit for the project. each period, then we will have to calculate and adjust again.
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