Understanding Cash Flow Management
There are many aspects of managing finances of a company. One of these is cash flow management that looks after cash flow, whether inflows or outflows. Understanding this concept is essential to avoid any liquidity crisis in the business. If cash with a business runs low and there is no chance of getting more cash in the near future, the situation of insolvency becomes inevitable.
Though cash flow forecasting is important for all business, it is particularly important for a start-up and all small businesses. Survival of a business can be predicted using the techniques of this important financial tool. Frequency of cash flow forecast is of course dependent upon how well the business is doing monetarily. If there is a resource crunch, it is prudent to keep an eye on the finances of the company and make a daily forecast of the cash flow. On the other hand, a weekly or even a monthly forecast is more suitable for a business that is financially stable. Also, revising forecasts of cash flow for such a business on a monthly basis is a good idea to let the owner know about the financial health of his business.
Factors that make cash flow forecast important:
Cash flow forecasting sounds advance warnings about impending shortfall of cash. This is why one should take it seriously.
It is cash flow forecasting that tells whether a business would be able to make payments to staff and suppliers or not. It is plainly clear that unpaid vendors and employees can make things difficult for a business to continue or survive.
Cash flow management can also identify problems that a business experiences with payments received from customers. If a problem is identified on this front, it is not good for the health of the business.
Cash flow forecasting is important from the point of view of the management also. Management can take decisions accordingly based upon this forecast.
Lenders and other shareholders can also make good use of cash flow management. They can learn about the financial health of a business they have invested in with the help of this financial tool.