Cash flow


Cash management is a broad term that refers to the collection, concentration,   and disbursement of cash. It encompasses a company’s level of liquidity, its management of cash balance, and its short-term investment strategies. In some ways, managing cash flow is the most important job of business managers. If at any time a company fails to pay an obligation when it is due, because of lack of cash, the company is insolvent.

Insolvency is the primary reason companies go bankrupt. Obviously, the prospect of such a dire consequence should compel companies to manage their cash with care. Moreover, efficient cash management means more than just preventing bankruptcy. It improves the profitability and reduces the risk to which the firm is exposed.

 Cash management is particularly important for new and growing businesses. Cash flow can be a problem even when a business has numerous clients, offers a superior product to its customers, and enjoys a sterling reputation in its industry. Companies suffering from cash flow problems have no margin of safety in case of unanticipated expenses. They may also experience trouble in finding the funds for innovation and expansion. Finally, poor cash flow makes it difficult to hire and retain good employees.

It is only natural that major business expenses are incurred in the production of goods or the provision of services. In most cases, a business incurs such expenses before the corresponding payment is received from customers.  In addition, employee salaries and other expenses drain considerable funds from most businesses. These factors make effective cash management an essential part of any business’s financial planning. Without cash for inventory, payroll, and other expenses, an emergency is imminent.

When cash is received in exchange for products or services rendered, many business owners intent on growing their company and tamping down debt, spend most or all of these funds. But while such priorities are laudable, they should leave room for businesses to absorb lean financial times down the line.

The key to successful cash management, therefore, lies in tabulating realistic  projections, monitoring collections and disbursements, establishing effective  billing and collection measures, and adhering to budgetary restrictions,

Cash Collection and Disbursement

 Cash collection systems aim to reduce the time it takes to collect the cash that is owed to a firm. Some of the sources of time delays are mail float, processing float, and bank float. Obviously, an envelope mailed by a customer containing payment to a supplier firm does not arrive at its destination instantly. Likewise, the payment is not processed and deposited into a bank account the moment it is received by the supplier firm. And finally, when the payment is deposited in the bank account, oftentimes the bank does not give immediate availability to the funds. These three “floats” are time delays that add up quickly, and they can force struggling or new firms to find other sources of cash to pay their bills.

Cash management attempts, among other things, to decrease the length and impact of these “float” periods. A collection receipt point closer to the customer (perhaps with an outside third-party vendor to receive process, and deposit the payment (cheque)), is one way to speed up the collection. The effectiveness of this method depends on the location of the customer; the size and schedule of their payments; the firm’s method of collecting payment; the cost of processing payments; the time delays involved for mail, processing, and banking; and the prevailing interest rate that can be earned on excess funds. The most important element in ensuring good cash flow from customers, however, is establishing strong billing and collection practices.

Once the money has been collected, most firms then proceed to concentrate the cash into one center. The rationale for such a move is to have complete control of cash and to provide greater investment opportunities with larger sums of money available as surplus. There are numerous mechanisms that can be employed to concentrate the cash, such as wire transfers, automated clearing house (ACH) transfers, and cheques. The tradeoff is between cost and time.

Another aspect of cash management is knowing a company’s optimal cash balance. There are a number of methods  that try to determine this magical cash balance, which is the precise amount needed to minimize costs yet provide adequate liquidity to ensure bills are paid on time (hopefully with something left over for emergency purposes). 

One of the first steps in managing cash balance is measuring liquidity, or the amount of money on hand to meet obligations. There are numerous ways to measure this, including Cash to Total Asset ratio, the Current ratio (current assets divided by current liabilities), and the Net Liquidity balance (cash plus marketable securities less short-term notes payable, divided by total assets). The higher the number generated by the liquidity measure, the greater the liquidity, and vice versa. However, there is a tradeoff between liquidity and profitability which discourages firms from leaving excessive liquidity.

Cash Management in Troubled Times

Many businesses experience cash flow difficulties, especially during their first years of operation. But entrepreneurs and managers can take steps to minimize the impact of such problems and help maintain the continued viability of the business. Suggested steps to address temporary cash flow problems include:

  • Create a realistic cash flow budget that charts finances for both the short term (thirty to sixty days) and longer term (1 to 2 years).


  • Redouble efforts to collect on outstanding payments owed to the company. The faster you mail an invoice, the faster you will be paid. If deliveries do not automatically trigger an invoice, establish a set billing schedule, preferably weekly. Businesses should also include a payment due date.
  • Offer small discounts for prompt payment.


  •  Consider compromising on some billing disputes with clients.  Business owners are understandably reluctant to consider this step, but in certain cases, obtaining some cash, even if your company is not at fault in the dispute, for products sold/services rendered may be required to pay basic expenses.


  • Closely monitor and prioritize all cash disbursements.


  • Contact creditors (vendors, lenders, landlords) and attempt to negotiate mutually satisfactory arrangements that will enable the business to weather its cash shortage (provided it is a temporary one). In some cases, you may be able to arrange better payment terms from suppliers or banks. Better credit terms translate into borrowing money.


  • Liquidate superfluous inventory;


  • Assess other areas where operational expenses may be cut without permanently disabling the business, such as payroll or goods/services with small profit margins. Every operation struggling for survival is losing money in some of its components. As you analyzed your business, you probably noticed some places where cash was bleeding out of your business without an adequate return. Plan to step out the bleeding; that is, cut out the losers. 


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Bernard Taiwo

I am Management strategist, Editor and Publisher.

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