Business cash flow management is an extremely urgent aspect, directly determining the survival and development ability of a business. It helps businesses maintain financial stability, ensure sufficient capital for daily operations, avoid financial risks and the ability to pay debts when due.
This article will delve into the basic concepts, importance, methods and supporting tools for effective cash flow management.
1. What is cash flow and why is it necessary to manage business cash flow?
Cash flow is one of the vital factors in the financial activities of enterprises, directly affecting the ability to pay, invest and develop in the long term. Understanding and effectively managing cash flow helps enterprises avoid the risk of financial imbalance, while taking advantage of growth opportunities.
1.1 Definition of Cash Flow
Cash flow is a financial indicator that shows the actual movement of cash and cash equivalents into and out of a business over a given period of time. Cash flow can come from core business activities (sales revenue, operating expenses), investment activities (purchase and sale of assets, shares) or financial activities (borrowing capital, paying dividends). This is a core indicator that reflects the health of a business's financial flow and its ability to survive in both the short and long term.
1.2 The importance of business cash flow management
Managing a business's cash flow plays a vital role in every stage of development, from start-up to scale-up. Specifically:
- Ensuring liquidity and smooth operations: Helps businesses stay on top of their operating costs, employee salaries, taxes and other financial obligations on time.
- Minimize financial risk: Effective cash flow forecasting helps businesses anticipate shortages, thereby proactively adjusting financial plans and avoiding crisis.
- Optimizing investment and costs: By understanding cash flow, businesses can choose the right time and form of investment, avoiding waste or uncontrolled deficits.
- Strategic decision support: Cash flow data helps leaders identify financial strengths and weaknesses, thereby making timely business and expansion decisions.
- Increase capital mobilization capacity: A business with transparent and stable cash flow management will easily create trust with investors, banks and partners.
In a constantly changing business environment, business cash flow management Not only a control tool but also a strategic lever to help businesses develop sustainably and create long-term competitive advantages.
2. Concepts and classifications when managing business cash flow
To effectively manage business cash flow, it is necessary to start with a clear understanding of the basic concepts and how to classify cash flow. This is the foundation for business owners to make accurate decisions, ensuring financial operations are always stable and flexible.
2.1 Distinguish cash flow from revenue and profit
Revenue, profit, and cash flow are three financial metrics that are often confused but have completely different meanings:
- Revenue: Is the total amount of money a business receives from sales or service provision in a given accounting period, not including expenses.
- Profit: Is the remaining amount after deducting all operating costs (including fixed, variable, depreciation, etc.) from revenue. This is an indicator that reflects business performance on the accounting books.
- Cash flow: Is the actual flow of cash (bank deposits, cash) into and out of the business. Cash flow shows the actual liquidity and solvency of the business.
Specific examples: A business has revenue of 1,000,000 VND, expenses of 800,000 VND → profit of 200,000 VND. However, if a new customer pays 700,000 VND and the business has spent 300,000 VND, the actual cash flow is only 400,000 VND, much lower than the recorded profit.
2.2 Related concepts
Understanding the types of cash flows helps businesses accurately assess their financial health:
- Cash Inflows: Includes money from sales, debt collection, profitable investments or capital raising.
- Cash Outflows: Are expenses for operating costs, purchasing raw materials, repaying loans, investment costs, interest, etc.
- Positive Cash Flow: When cash inflow > cash outflow → the business has good payment ability, less dependent on external capital sources.
- Negative cash flow: When cash inflow < cash outflow → warns of risk of insolvency, timely adjustment is needed.
- Net Cash Flow: The difference between total cash inflow and cash outflow in a period. Is an indicator to assess the actual increase/decrease in liquidity.
- Free cash flow (Free Cash Flow): The amount of money left over after all operating expenses have been paid – this is an important resource for reinvestment or dividend payments.
- Even and uneven cash flow: Even cash flow reflects stability and ease of control; uneven cash flow requires businesses to have more flexible backup plans.
- Cash Flow Statement: A mandatory report in the financial reporting system, helping to track and analyze in detail the cash flow in and out during the period.
2.3 Classification of cash flows by activities
In financial statements, cash flows are classified into three main groups:
- Operating Cash Flow (OCF): Related to revenues and expenditures from core activities such as sales, salaries, purchases of raw materials, etc. This is the main source of cash flow that reflects the business's ability to generate money.
- Investing Cash Flow (ICF): Includes transactions of buying and selling fixed assets, contributing capital to projects, investing in other companies. Negative cash flow in this item can be positive if it reflects long-term investment.
- Cash flow from financing activities (Financing Cash Flow – FCF): Arising from raising capital, paying dividends, borrowing and repaying debt. Helps evaluate the business's capital financing and debt repayment strategy.
3. Steps and methods to effectively manage business cash flow
To manage cash flow effectively, businesses can apply the following steps and methods:
3.1 Cash flow measurement and forecasting
Cash flow planning is the foundation of corporate financial management. Measuring and forecasting helps businesses detect cash shortage risks early and make necessary adjustments:
- Cash flow forecast: Synthesize data from sales, investment income, project cash flow, customer payment time.
- Cash outflow forecast: List recurring expenses such as rent, salaries, taxes, and seasonal variable costs.
- Calculate net cash flow: Take the total cash inflow minus the cash outflow to determine the cash gap.
- Suggest appropriate action: If there is a surplus, the business can invest profitably. If there is a deficit, it needs to adjust spending or find short-term financing.
3.2 Improve receivables
Increasing customer collection efficiency is key to maintaining a steady cash flow:
- Offer attractive discounts for customers who pay early.
- Apply payment policy when ordering or check new customer credit.
- Manage inventory effectively to avoid defective goods and slow consumption.
- Issue invoices on time, track payment status.
- Establish a bad debt handling process and encourage payment via cash or bank transfer upon delivery.
3.3 Accounts Payable Management
Reasonable spending helps businesses maintain cash flow while ensuring reputation with suppliers:
- Monitor expenses regularly, do not expand spending indiscriminately according to revenue.
- Make the most of your payment terms to maintain cash flow.
- Payment by bank transfer on due date.
- Proactively negotiate with suppliers for appropriate payment terms.
- Compare prices and payment terms overall rather than focusing solely on the low price.
3.4 Overcoming cash deficits
In the context of businesses facing temporary cash flow difficulties, a flexible response strategy is needed:
- Build up a credit line or good credit relationship with a bank.
- Negotiate with suppliers to extend payment schedule.
- Cooperate with financial intermediaries to speed up debt collection.
- Offer policies to encourage customers to pay in advance.
- Take advantage of idle assets by selling or leasing them to generate additional cash flow.
- Prioritize important payments and renegotiate payment schedules with partners.
3.5 Real-time cash flow tracking
Real-time monitoring helps businesses check the accuracy of cash flow forecasts and react promptly:
- Compare actual cash flow with projected plan to detect deviations.
- Analyze the cause of the discrepancy and update the cash flow plan.
- Adjust business and financial strategies based on real-world data.
4. Factors affecting business cash flow management
The effectiveness of a business's cash flow management is affected by many factors:
- Political and legal environment: Political stability and a transparent, open legal system create the conditions for business operations and influence financial decisions.
- Economic environment: Cash flows are sensitive to changes in the economy (growth, recession, inflation). High inflation can increase costs and reduce cash income of the business.
- Business characteristics: Asset and product structures differ between industries (manufacturing, trade, services) leading to different cash flows and expenditures.
- Scale and level of diversification of business activities: Larger businesses tend to have more stable cash flows. Diversification helps to better manage cash flow.
- Qualification of human resources working in cash flow management: The expertise and experience of financial staff determine the quality of advice and decisions on cash flow, ensuring continuous cash flow.
- Corporate financial policy: Investment, financing and profit distribution decisions (e.g. dividend payments) directly affect cash flow and liquidity.
5. Tools and solutions to support effective business cash flow management
5.1 Traditional and popular tools
Before adopting modern technology solutions, many businesses still rely on traditional tools to manage their cash flow. These tools are easily accessible, low cost, and can be deployed quickly on a small scale or in the early stages of a business:
- Manual book: A popular choice for small shops, businesses or new businesses. Books help to record daily income and expenses clearly, but are prone to errors and take time to reconcile.
- Excel and Google Sheets software: With the ability to automatically calculate, set up formulas and visual charts, Excel and Google Sheets help businesses save time and minimize errors when entering data. Google Sheets also supports cloud storage and real-time data sharing - suitable for accounting teams working remotely or in multiple locations.
- Balance sheet: Is a comprehensive tool to monitor the financial situation of a business, including assets, liabilities and equity. Periodically updating the balance sheet helps businesses assess their financial health and short-term and long-term solvency.
- Cash flow statement: A mandatory document in the annual financial report, the cash flow statement clearly shows the three main cash flows: operating, investing and financing activities. Analyzing this report helps managers understand where the money comes from, how it is being used and forecast future cash flow trends.
- Budget management: This tool helps businesses plan their finances, estimate costs, and set limits for income and expenditure items. Effective budget management helps avoid overspending, increase profitability, and keep cash flow healthy.
- Asset and Liability Management: Regular monitoring of fixed assets, current assets and debts helps businesses use resources reasonably and maintain financial reputation with partners and suppliers.
- Financial analysis and risk managementEnterprises can use financial indicators (such as payment ratio, financial leverage, profit margin, etc.) to evaluate operational efficiency and early identify risks of cash flow imbalance. From there, timely measures can be taken to prevent risks.
5.2 Technology solutions from Bizzi
In today's technological age, many tools and financial management software was developed to help automate the process of aggregating information about revenues, expenditures, deposits and loans. Bizzi provides a Comprehensive cost control system and is AI assistant for finance and accounting department in automating revenue and expenditure processes, integrating over 30 features to streamline and automate cost management, debt collection and B2B payments.
Bizzi offers a comprehensive digital solution ecosystem that helps businesses automate financial and accounting processes, from invoice processing to expense and debt management. Below are the outstanding features that support effective, transparent and real-time cash flow control:
- Processing, reconciling and managing input invoices (IPA + 3-way matching): Use Bizzi Bot combining RPA and AI to automatically upload, check and reconcile invoices with purchase orders (POs) and warehouse receipts (GRs), helping to detect discrepancies instantly and limit fraud. Invoice data is directly synchronized with the ERP/accounting system, supporting accurate and timely management of business cash flow.
- Verify suppliers and store invoices securely: Automatically check supplier's tax code and operating status on the tax system; store electronic invoices for 10 years to help businesses easily retrieve, compare and ensure compliance with legal regulations.
- Monitor business spending with Bizzi Expense: Set budgets for each department or project; track actual costs against plans and issue warnings when they exceed them, helping businesses stay on top of their cash flow. Flexible approval systems support the automation of internal expense processing.
- Effective expense management (Bizzi Travel): Automate ticket booking, business expense management and budget limits. All expenses are synchronized to the cash flow management system, helping to track cash flows for each specific task, ensuring transparency and risk control.
- Electronic bill (B-invoice): Create and issue electronic invoices in accordance with regulations, support mass issuance and synchronize with tax authorities. Easily look up, download, adjust and manage invoice status to help customers' cash flow be processed smoothly and promptly.
- Automation debt management (ARM): Create an automatic debt reminder process, track debt aging reports and DSO (days sales outstanding) time of each partner. Businesses can promptly detect risky collections and proactively coordinate cash flow to minimize liquidity pressure.
Businesses register for trial at: https://bizzi.vn/dang-ky-dung-thu/
6. Risks of ineffective corporate cash flow management
Poor cash flow management poses many serious risks to businesses:
- Cash Shortage and Bankruptcy Risk: Insufficient cash reserves are one of the most common reasons why businesses fail. Paper profits do not guarantee survival if a business does not have enough cash to pay its bills, leading to lawsuits and bankruptcy.
- Waste due to excess cash: Excessive cash surplus shows that money is not used effectively and timely, causing waste of resources while the business may have to borrow capital at high interest rates.
- Increase cost of borrowing and difficulty in paying debts: Without effective cash flow management, borrowing costs can increase significantly, affecting profitability and debt repayment ability, and damaging reputation with suppliers and partners.
- Limited investment and expansion opportunities: Lack of flexibility in financial decision making due to unstable cash flow will prevent businesses from taking advantage of investment opportunities and expanding their business.
7. The relationship between profit and cash flow
In the process business cash flow managementUnderstanding the relationship between earnings and cash flow is key to properly assessing financial health. While both are important, they reflect different aspects and can lead to different financial decisions if not analyzed comprehensively.
- The basic difference between profit and cash flow: Profit reflects the performance of the business during the accounting period, including non-cash items such as depreciation or outstanding receivables. Meanwhile, cash flow focuses on the actual movement of cash into and out of the business, reflecting the ability to pay immediately.
- Impact of economic cycles:
- In recession phase, reduced consumer demand, increased fixed costs and extended collection periods have resulted in both profits and cash flows declining.
- Recovery phase Helps businesses increase sales and improve cash flow through better debt collection.
- Growth phase is when a business achieves both optimal profit and cash flow, if financial management is effective.
- Parallel profit and cash flow optimization measures:
- Increase accounting and debt collection efficiency: Establish tight accounting procedures and shorten collection cycles.
- Cost Control: Eliminate unnecessary costs, optimize production and operations.
- Financial reserves: Maintain cash reserves to deal with risks such as crises and market fluctuations.
- Balance revenue and costs: Increasing sales needs to go hand in hand with controlling debt and expenses, ensuring no cash flow deficit.
Optimizing both profit and cash flow at the same time will create a solid financial foundation, helping businesses be more flexible in operations and sustainable in the long term.
Conclude
In the process of managing business cash flow, controlling and operating cash flow not only brings stability but also is the key to sustainable development. By applying the right control measures, from planning, managing receivables/payables, overcoming deficits, to using modern management tools and software such as Bizzi's solution, businesses can build a solid financial foundation, creating favorable conditions for their success and future orientation.
To improve the efficiency of invoice management as well as automate the financial and accounting processes of the business. Register to experience Bizzi's comprehensive solution suite today!
- Link to register for a trial of Bizzi products: https://bizzi.vn/dang-ky-dung-thu/
- Schedule a demo: https://bizzi.vn/dat-lich-demo/
