Managing your cash flow – Cash is King

Cash is king – Managing your cash flow – It takes money today to make money tomorrow!

This is the third and final part of my “Cash is king” series. As a recap, in the first part of this “cash is king” series, I wrote on why you need a business plan and what the key elements those are required in a business plan before you seek funding. On the second part, I wrote on the different sources, strategies and tactics for the funding of a small business. This last and final part of the “cash is king” series, I will discuss on the strategies and tactics of managing your cash flow.

It is important for SME owners and managers to grasp the concept of cash flow management or working capital management as it is commonly known. Before I get into why it is important, let me first define what it means.

What makes up working capital?

Working capital are the items items in the short term part of the balance sheet that includes cash, short term debt, investments, inventory, debtors (receivables), payables (creditors) and so forth.

The net working Capital is the difference between the current assets and current liabilities.

Current Assets

  • Inventory
  • Sundry Debtors (account receivables)
  • Cash and Bank Balances
  • Loans and advances

Current Liabilities

  • Sundry creditors (account payables)
  • Short term loans
  • Provisions

Keep in mind that current assets have a short life span and that they should be quickly transformed into other asset forms. For example, cash is used to acquire raw materials or supplies and these supplies or materials are converted into a finished proposition. These which are sold on credit are converted into account receivables and finally into cash when payment is received.

What is working capital management?

Working capital is often referred to as cash flow management, cash management and or liquidity management.

Therefore, the effective forecasting, budgeting, planning, tracking, reporting and management of your current assets and liabilities is what is referred to as working capital management.  A small business owner or SME manager’s ability to forecast, budget, plan and monitor the liquid resources of an SME will determine whether the business will exist, survive or thrive.

The monitoring and management of “liquidity” of the following aspects of your business is critical for the success of any small business. These activities could include managing the following:

  • Day-to-day cash control
  • Money at the bank
  • Receipts
  • Payments
  • Short term investments and borrowings
  • Provision of bank accounts
  • Deposit / withdrawal facilities
  • Provision of information regarding bank accounts and positions
  • Money transfers and collection services
  • Investment facilities
  • Financing facilities
  • Pooling and netting
  • The fundamental principles of working capital management are reducing the capital employed and improving efficiency in the areas of receivables, inventories, and payables.

Why is cash flow management important?

Before I dwell into the implications of why cash flow management is critical for a small business, it is important to understand these from a small business owner or an SME manager’s perspective. Your role as a principal in the business requires you to be a:

  • Cash seeker – you have to source the funding from investors or lenders!
  • Cash budgeter – you have to plan and forecast your cash requirement!
  • Cash disburser – you have to allocate and disburse payments appropriately and optimally!
  • Cash collector – you have to ensure that cash is collected for goods delivered or services rendered!
  • Cash retainer – you have to retain cash for funding the operational activities of your business!

So why is cash flow management important?

There are many reasons why cash flow management is critical for the existence of your business. The key ones are:

  • Manage risks – Your business might be earning a profit but you can be forced to exit or close your business if you run out of cash!
  • High levels of investments in current assets - Investments in current assets form a significant part of small businesses overall investments. Therefore managing working capital optimally will determine if the business is going to exist, survive or thrive.
  • Using current liabilities to fund a small business – Most small businesses fund the operational aspects of their businesses through the current liabilities. Managing it optimally will determine if you have a business or not!
  • High opportunity costs – If you do not manage your working capital well, you might not have the requisite cash flow to take advantage of new growth opportunities, special discounts and increased demand. In other words, there is a huge opportunity cost if you do not manage your working capital well.
  • Ability to fund the running of a business – Adequate working capital is required to ensure that your business is able to continue its operations and that you have enough funds to pay maturing short-term debt and ongoing operational expenses.
  • Increase overall free cash flow – Optimizing working capital results in availability of liquidity and thereby an improvement in your overall free cash flow which can be used to pay dividends to your investor, pay off you debts and or reinvest in the business.
  • Reduction in expenses – Optimal working capital management will lead to a significant reduction in your inventory and borrowing costs, thereby further increasing your profits and liquidity for “upside opportunity” investments and debt reduction.
  • Strengthened balance sheet gives increased stakeholder confidence – A strengthened balance sheet for your small business will mean that your suppliers, customers, lenders, investors and even your employees will have increased confidence in your business.

Strategies and tactics to optimize your cash flow and or liquidity

Before I discuss the strategies and tactics to optimize your small business cash flow management, it is important to understand the concept of “Float”.

What is a “float”?

A float cost is any delay in the process of converting materials, labour and services to receipt of payment that involves cost.

Similarly, any delay in making payments to your suppliers will also give rise to float. Note that this is advantageous to a small business (up to a point).

In other words, a float is time lost between a payer making a payment and a beneficiary receiving value

So what are the strategies and tactics to manage a small business cash flow?

In simplistic terms, cash flow can be as simple as making sure that that a small business has enough profitable revenues. The primary reason a company often creates an environment of cash crunch is due to the lack of understanding of the “timing” element.

Achieving higher revenues than expected sales is useless if you can’t pay your bills during the time it takes for the proposition to be crafted and sold in the market.

There is no one single solution to managing a small business’s cash flow.

  • Manage SME owners and management compensation – For some small businesses, the owner’s and management team’s compensation is often a large portion of the business’ expense.  Especially in the developing years of a business, the owner’s draw can be a big burden on the cash flow of the business.  That is why secondary incomes are valuable to the success of many small business ventures, especially in the early years.
  • Manage your overheads – Cut out excess overhead expenditures.  Good spending discipline should keep unnecessary expenditures to a minimum, but good cash flow management should help to virtually eliminate excess overhead expenditures.  Bad spending habits are often picked up when cash is plentiful.
  • Cash flow information system and processes – You need to ensure that your financial information is maintained, stored and monitored in a manner that allows you to make the necessary adjustments for your small business.  Therefore develop a good information system.  Continual cash flow management is only as good as the information on which it is implemented.  A record-keeping system that provides information useful to making decisions regarding cash inflows and outflows is essential.
  • Planning and forecasting capabilities, processes and systems – A SME owner or manager will need to be able to plan, forecast optimally your anticipated sales and expenditures. This is often overlooked.
  • Rent, lease versus outright buy – Consider cash saving activities such as renting versus buying and used equipment versus new.
  • Understanding cash flow peaks and troughs – You must know when your cash in and cash out peaks!
  • Limit overdue accounts due to the business – A small business must limit the money that is owed to it. In other words, get people to pay their bills.  Overdue accounts receivables can pull down a business.  One way to address this problem is to keep credit current and at a minimum. This is often a bigger task than it may seem.
  • Manage your credit risk – Caution should be taken when credit is first extended to customers.
  • Give incentives for on time and advance payment – Consider giving discounts for advance payments and incentives for payments made by the due date.
  • Tight inventory management – Keep a close eye on inventory. Product sales and inventory management are complex issues that can be likened to the “chicken and egg syndrome.”  A business needs enough inventories to fill orders in a timely manner, but adequate sales are needed to minimize inventory.  Inventory includes finished products held for future sales as well as raw materials held for future production.  Both types of inventory represent cash that has been spent but that has not generated a return.  Get rid of or sell inventory items that are just gathering dust at a discounted price.
  • Timely billing and collections – Maintain tight reigns on billing and collections.  Because cash flow management is so closely tied to time (flows), the time lag between shipping finished products and receiving payment for them should be minimized.  The time lag issue must be aggressively addressed by collecting payments and sending invoices in a timely manner. Consider daily, weekly or semimonthly invoicing rather than monthly or bimonthly invoicing.
  • Optimally structuring payments to creditors – Consciously structure the payment of your bills.  Electronic deposits and delayed payment of bills can improve cash flow problems.  However, there is often a fine line between delayed payments and late payments.  Crossing that line and incurring additional costs for late payments is normally not a good cash flow management procedure.  Discounts on bills should be evaluated, i.e., consider discounts that offer less than the amount you save by delayed payments.  All non discount bills should be delayed as late as possible without compromising good relations.  Do not hesitate to take advantage of credit offered by suppliers and feel free to negotiate for more favorable terms.
  • Issue monthly paychecks for employees – Consider biweekly or monthly paychecks.  Biweekly and monthly payrolls allow the business to hold onto money longer.  It also allows for less frequent deposit of associated payroll and other taxes.
  • Monitor your customers’ payment patterns - Monitoring certain customers may provide insight into their payment schedule.  A SME should consider dropping or implementing new payment procedures for customers who continually pay late.
  • Evaluate new customers from a cash flow perspective – When taking on new customers, consider implications on cash flow as part of the evaluation criteria, not just increased sales.  Payment terms influence potential customers, but be cautions not to offer over generous payment terms.
  • Automation and outsourcing – Consider your operations and manufacturing if automation is better than using your own versus labor. Other considerations include considering giving a part of your operations to subcontractors versus manufacturing or servicing all aspects of the production or operations internally. .
  • Differentiate your customers – Segment and differentiate your cash and quick paying customers versus credit and late payers.
  • Business agility to adjust – The business should have the capability, the willingness and readiness to make adjustments to the business and financial operations.


In summary, cash flow management is one of the most fundamental issues that a small business will have to grapple with. Mismanaging or not understanding the timing of your cash flow will determine if your business will thrive or perish. Remember that money makes money. More importantly, money today makes money tomorrow!

As an unnamed entrepreneur once famously said that “the fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality”. Another quote that captures the essence of cash flows is what Fred Adler once said- “Happiness is a positive cash flow”!

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