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Understanding Cash Flow and Cash Management

Chris Doxey

Poor cash management is a telling sign of a company under pressure. An organization’s cash flow is comparable to a heartbeat; mimicking the inflow and outflow of cash. And just like a heartbeat is a way to gauge health, cash flow can be used to measure the overall health of an organization.

desktop with calculators for figuring and managing cash flow

Cash flow 101

Remember Accounting 101? As a refresher, understand that positive cash flow refers to more cash entering an organization than leaving—as accounting books may put it: inflow cash exceeds outflow.

Negative cash flow refers to the opposite—outflow cash exceeding inflow.

Make no mistake; cash flow shouldn't be confused with inventory or accounts receivable. Nor should it be confused with profits or property assets. Simply put, cash flow is liquid—it’s the amount of cash in the bank. It’s money on hand ready to pay for those unforeseen events.

Components of cash flow

An organization’s cash flow statement is divided into three sections:

  1. Operations—Operating cash flow is commonly referred to as working capital. This is the income generated from day-to-day operations. It comes directly from the sale of goods or services to customers.
  2. Investing—Investment money is generated from non-operating, non-day-to-day activities. This is usually in the form of investments in equipment, non-recurring gains or losses, or other sources outside of normal operations.
  3. Financing—This is the cash coming from and going to external sources. Examples include of which would be new or repayments of loans, issuing more common stock, and the payout of dividend.

Use good business practices

Managing a company’s cash flow is akin to conducting an orchestra; requiring several components playing in harmony. From controlling disbursements to covering shortfalls in anticipated revenue; from investing idle funds to forecasting future cash needs, CFOs, controllers, and treasurers are the maestros in the finance department.

What’s more, when playing for a global audience—aka global cash management—these financial conductors must sing a tune that harmonizes with international tax and accounting regulatory agencies.

Here are five cash flow management tips (in no particular order) you can put to work in your organization:

  1. Improved investment strategies
    You don’t make investment choices based on a hunch, so why would you leave corporate investment open to interpretation? Set expectations for what acceptable investments look like.

    A clearly written investment policy should state which investments are and aren’t acceptable. A few topics to review in the investment policy should include which accounts are available for investment, frequency in re-evaluating investment portfolios, and how to re-invest dividends.
  2. Accurate forecasting models
    Business analysts in the past would have to keep several forecasts readily available—be it yearly, quarterly, monthly, or daily. What’s more, these forecasts would have to be easily accessible. And because of the complex nature of data embedded in disparate departments, compiling accurate forecasts was a difficult and time-consuming task plagued with outdated information.

    Modern, cloud-based ERP systems allow for an always up-to-date forecast the moment it’s requested.

    This single feature is reason enough for analysts everywhere to push for an ERP rollout within their organization.
  3. Regularly review cash management systems and procedures
    Regularly audit procedures and identify opportunities for improvement. In addition to unearthing new opportunities, frequently auditing these procedures gives companies the confidence in their records—without having to perform full audits.

    What’s more, modern solutions have ushered in the integration of data silos. This makes regularly reviewing cash flow statements as simple as clicking a button.
  4. Create a single infrastructure for international organizations
    The peculiarities of cash flow management are compounded when companies participate in global economies. Organizations, then, need to be cognizant of relevant procedures within the borders where the cash is earned—as per local and international ordinances—along with methods for integrating those foreign cash management functions with the organization’s domestic counterpart.

    If, when, and how to move those currencies back into the organization's home country is a topic beyond the scope of this article. Re-domiciling those funds, then, is left to the discretion of the CFO.
  5. Limit core cash management banks
    It’s also in your organization’s best interest to limit the number of banking institutions performing essential services, like processing transfers and international payments. This is an example where you don’t want too many chefs in the kitchen.

    Conversely, you should always be comparing competing banks’ services—and make those terms transparent and openly available to all banks you may choose to work with at a future time. That way, if and when you do decide to jump ship, you’ll be able to do so with little interruption in service.

 

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