How Does a Company Practice Good Cash Flow Management?

November 11, 2016 Chris Doxey

Every business owner knows the keys to its success or failure pivot on the same axis—cash flow. Cash flow, at its simplest, is a lesson in supply and demand.

While cash flow isn’t the only indicator of a business’ health, it is an important one.

desktop with pens and calculators for managing cash flow

Developing a cash flow projection is how business owners keep an eye on their financial health. Not that with any cash flow strategy, it’s important to have a short- and long-term plan. The process involves forecasting cash needs, investing money, and identifying shortfalls.

What are the components of cash flow?

A cash flow statement is understood by its three components:

  1. Operating Cash Flow

    Operating cash flow (also called working capital) is cash resulting from revenues, gains, losses, and expenses. This kind of cash flow is generated from daily operational activities—such as the sale of goods or products.

  2. Investing Cash Flow

    Investing cash flow is cash resulting from the sale of property or equipment, the sale of debt, or cash collected from the principal payment of a loan.

  3. Financing Cash Flow

    Financing cash flow is cash from the reacquisition of company stock or cash dividends paid to shareholders. This cash comes from outside the company.

How does a company practice good cash flow management?

Improving cash flow management is about looking towards the future. While a business owner cannot control every factor, cash flow management is about knowing when and how to budget, cut down on expenses, and anticipate shifts that will affect the liquidity of cash within the organization.

It means having a plan for scaling economically, unexpected cash shortfalls, and securing relationships with banks and creditors from which additional cash can be sourced if needed.

About the Author

Chris Doxey

Chris Doxey, CAPP, CCSA, CICA is an independent management consultant providing Internal Controls and Business Process Best Practice Solutions. She has extensive experience in procurement, accounts payable, internal auditing, internal controls, Sarbanes-Oxley compliance, payroll, logistics, financial systems strategy, and financial integration at Digital, Compaq, Hewlett Packard, MCI, APEX Analytix, and Business Strategy, Inc. She was recruited to assist MCI (formally WorldCom) recover from their internal control challenges. She has a bachelor's degree in English, a bachelor's in accounting, a master's in business administration, and a graduate certificate in project management. Chris has written numerous articles and published two handbooks: AP Leadership Skills and Implementing a Controls Self Assessment Program for Your Accounts Payable Department.

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