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Cash Flow Tops Corporations’ Concerns

Cash Flow Tops Corporations’ Concerns


When this article was written in December 2021, the world is still struggling with the COVID 19 pandemic. Since the early 2020, businesses, households and governments are finding ways to ensure that all things could move on, but all are facing uphill tasks.

In business, all are concerned not on profit, but how to survive. Profit cannot ensure survival. We see businesses reported good profits in 2019 and early 2020 but collapsed shortly after.

Generating sufficient cash flows from operating cycle of a business has always been an important priority for corporations, but lately it has taken on increasing importance. For many companies, managing cash inflows and cash outflows have become a higher priority. Yet the two main financial statement – the income statement and the statement of financial position (also called the balance sheet) – tend to be more accounting standard compliance in their structure and content. While these two financial statements make good sense within their own contexts, they do not provide a full picture of the company’s cash position or tell managers how to improve it.

Managing cash revenue and cash expenses

In financial accounting, a company may recognise revenues when goods or services are accepted by the customers, but the cash collection from the customers may occur later. Similarly, when purchases and expenses are incurred, the actual cash payment may take place at a later date. Therefore, the top concern for most corporations is managing the timing of the cash flows – when the cash is collected, and when the cash payment is made.

Remember, any company, no matter how big or small, moves on cash, not profits. Firms cannot pay bills, salaries, expenses, etc., with profits, only cash.

Statement of Cash Flow

Learning how to report cash flows in a systematic and structured manner helps to manage the company’s financial health. The information from the statement of cash flow helps a firm to know whether it is spending too much or saving too little. Such information helps the firm to improve cash and resource allocation and management.


Conducting a Cash Flow Projection Analysis – Cash flow budgeting

After completing a plan for how to grow your business, you should conduct a cash flow projection analysis. This technique looks at your cash flow to determine how much money you will be generating. You can either start with an estimated number of dollars in revenue—for example, if your business is generating $100,000 cash inflows a month, you might then plan cash outflows of not more than this amount.   Such prudent cash flow projection analysis will strengthen the firm’s financial health.


Cost Cutting, Cash Saving

As managing expense control is within the control of the management, the first step in making good decisions when dealing with cash flow is to look at the expense items incurred by the company. Cost-cutting leads to cash savings. Efforts to reduce expenses from all ranks improves cash position.


Asset disposal

Firms may keep long term assets even if these assets generate low or no returns on assets. Unused factory space, underutilized machines, are come of the common examples. If the firm does not have plans to utilize these assets in the near future, such assets should be disposed of to help the firm to generate cash inflows.


Customer Service

Customer service is the life blood of your business. Good customer service leads directly to revenue—and generates cash inflows. Although someone may argue that high quality customer service costs money, in the long run, however, good customer service will make the company stand outs in the long run.

There is no doubt that cash flow has become a top management priority for corporations – as it should be for any business that experiences significant growth and change. Yet many firms have failed to seriously look into and manage cash flow effectively.


Golden Principles of Cash Flow Management

A business is considered healthy if its cash inflow is greater than its cash outflow.

There are two important principles that we must always adhere to in cash flow management. This is especially important when we are preparing the cash flow budgets.


Rule No 1: Cash inflows must always be higher than cash outflows

Positive cash flow occurs when the total cash inflow is higher than the total cash outflow during a period of time. It is important to emphasize to all staff that an organisation must maintain a positive cash flow so as to have sufficient cash to run and operate.

Positive cash flow brings a lot of advantages to an organisation. It signals wealth creation, allows the firm to invest and grow business, and rewards the investors and stakeholders.


Rule No 2: Cash inflows first, cash outflows next

It is more challenging to achieve this, as many businesses always must pay for materials and expenses so as to provide goods and services to their clients, but the firm only receive payments from their clients much later.

However, such problem can be overcome by arranging short term bridging loan facilities with financial institutions to overcome the initial period of cash shortage. Over time, the firm should make sure that subsequent cash received from sales is sufficient to cover future expenses and raw material purchases.


Cash Flow Management Skills

In today’s fast changing business development, it is very important for the management staff in any organisation (private sectors, not for profit organisations, social services providers, etc) to acquire the following cash flow management skills:

  • Construct cash flow statement
  • Identify cash flow problems from operating activities
  • Manage, mitigate and reduce cash flow risk
  • how to manage your cash flow effectively
  • Factors to be considered when preparing cash flow budget

To know how to improve cash flow management, we have created an intensive 1-day workshop on “Effective Cash Flow Management” to enable participants to understand the different cash flow related terms and learn how to produce an accurate cash flow budget for an organisation.

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