Cash flow in business is the lifeblood of survival and growth. Knowing how to manage cash flow Efficiency is not just a financial operation but also directly affects the solvency, investment opportunities and long-term stability of every company.
In a volatile business environment, how do you control and optimize this cash flow? Bizzi will explore with you the nature, role and methods of management. cash flow in business scientifically, helping you save time and operate according to international standards.
first. What is cash flow in business?
First of all, it is necessary to clearly distinguish cash flow in business with accounting profit. Profits reported on the income statement are based on accrual accounting and do not necessarily reflect the actual amount of cash a business has. A company can report profits but still have financial difficulties. cash flow If receivables are too large or many debts are due.
Cash flow in business is the actual movement of cash and cash equivalents into and out of a business over a period of time. time certain.
To understand it deeply, we need to look at its core properties:
- Source: Cash flow classified based on source arise, including three main activities:
- Cash flow from operations (CFO): Reflects the amount of cash generated from core business activities, such as sales revenue, supplier payments, and payroll. This is the most important indicator of a company's operating health.
- Cash flow from investing activities (CFI): Relating to the purchase or disposal of long-term assets such as machinery, equipment, real estate, or financial investments.
- Cash Flow from Financing Activities (CFF): Arising from capital transactions with owners and creditors, such as bank loans, loan principal repayments, stock issues, dividend payments.
- Trend): Cash flow have two afternoon is cash inflow (thu) and cash outflow (cash). The difference between these two streams constitutes the net cash flow.
- Amount/Size: Specific values of revenues and expenditures during the period, indicating scale of cash flow.
- Time/Time: Time The actual money coming into or going out of a business is an extremely important factor, directly affecting the ability to pay immediately.
- Periodicity/Frequency: Cash flow are usually monitored and reported according to cycle certain period (month, quarter, year) to analyze trends and management effectiveness.
2. The role of cash flow management in the business
Manage business cash flow Efficiency is an essential requirement, directly determining existence and development.
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, excess cash in the capital of the enterprise will lead to cash not being used effectively and timely, leading to waste while the enterprise has to borrow capital from banks or credit funds with high interest rates. This will once again show weakness in operations. corporate financial management.
Analysis cash flow It is necessary to consider trends over periods, compare plans with reality and assess the proportion of each type of activity (business, investment, financing) in the total. cash flow.
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3. How to make a detailed business cash flow management plan
Step 1: Forecast cash inflow
Estimated expected revenues from three source main:
- Business activities: Based on revenue forecast, sales policy, average collection time from customers.
- Investment activities: Based on the plan to liquidate fixed assets, recover investment capital, receive interest/dividends from investments.
- Sponsorship activities: Based on capital mobilization plan (loan, stock issuance).
Step 2: Predict cash outflow
Estimated expected expenses are also based on three source:
- Business activities: Purchase cost, pay salaries, pay interest, pay taxes, sales and administrative expenses.
- Investment activities: Expenses for purchasing fixed assets and financial investments.
- Sponsorship activities: Payment of principal, dividends, repurchase of treasury stock.
Step 3: Calculate the net cash flow of the business
Calculate net cash flow: Get the sum cash inflow minus the sum cash outflow during the forecast 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
- If short of money: Consider measures such as accelerating debt collection, deferring non-urgent expenditures, seeking short-term loans, or raising additional capital.
- If you have extra money: Look for profitable short-term investment opportunities, pay off loans early, or temporarily deposit in the bank.
- This process is often iterative, as treatments in one period will affect cash flow next periods
4. Advanced principles of establishing and managing business cash flow
In addition to the fundamentals, management cash flow in business Effectiveness also needs to consider more complex factors:
- Seasonality: Many professions have cash flow fluctuates strongly Seasonality. Identifying and forecasting these cycles helps businesses prepare capital for peak and cost management in low season
- Cash flow quality: Not every cash flow positive is good. Need to evaluate cash flow quality, prioritizing cash flow from core, sustainable business operations instead of extraordinary revenues from asset liquidation or large debt.
- Sensitivity: Cash flow can be very sensitive to external factors such as interest rate fluctuations, exchange rates (especially for import-export businesses that use a lot of currency), or change economic policy. Evaluation sensitivity This helps businesses build response scenarios.
5. Conclusion
Cash flow management in business is a strategic task, requiring a deep understanding of the nature cash flow, the source, trend, time arising and influencing factors. Accurate planning, forecasting and tight control of revenues and expenditures help businesses not only ensure solvency but also optimize costs, improve capital efficiency and create a solid foundation for development.
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