Management of Cash Flow: a Critical Aspect of a Company

Cash flow management is a process that enables the company monitor, analyze and optimize the net amount of revenue relative to the expenditure. Cash flow management is a key indicator in determining the efficiency and productivity of the business, and consequently the financial health of the company. This chapter highlights the relationship between cash flow and the business with regards to the importance, classification, and analysis of cash flow and the counteractive measures of handling negative cash flows at the company.

Describe your understanding of the concept of cash flow management?

Business owner/Manager’s: Answer

Cash flow management refers how efficient the company manages its cash resources in an appropriate and accepted manner, which can help in the achievement of the business's objectives. In this context, the business aims to unify all the company resources to ensure maximum probable profitability and liquidity of the company.

Business owner/Manager’s answer converted to textbook language

Cash flow management is abroad aspect of finance which involves collecting, handling and using of cash. Additionally, it consists of evaluating and assessing the market liquidity, the cash flow of the business and the company investments. Financial tools and instruments used in cash management include the treasury bills, certificate of deposits and the money market funds.

Recommendation/Conclusion

The cash itself cannot be able to generate any revenue on its own to the company. This is because cash is instead the fundamental requirement of revenue generating sources and functions. Therefore, a company should ensure the minimum possible balance of cash, whereas to maintain its adequacy so as safeguard the solvency of the company.

Do you know the three classifications for cash flow?

Business owner/Manager’s Answer

The classification of cash flow depends on the nature of the business transaction with regards to the company. Therefore, the three classification of class flow presented in the company’s statement of cash flows includes, the operating, investing and financing cash flow.

Business owner/Manager’s answer converted to textbook language

The three classification for the cash flow of the firm includes but not limited to the operating, investing and financing activities. This classification is always dependent on the nature of the business transaction.

Recommendation/Explanation

Operating cash flow includes the cash transactions relating to the net income of the business such as the revenue and expenditure of the company, whereas investing cash flow consists of the cash transactions with regards to the non-current assets of the firm. Finally, financing flows include cash transactions associated with the owner's equity and the company's non-current liabilities.

How does your company generate cash for the business?

Business owner/Manager’s Answer

The company generates cash for the business through the effective management of payables and receivables to optimize the business's cash flow. Additionally, the cash inflows for the business is generated through the sale of the inventory to improve the liquidity of the company.

Business owner/Manager’s answer converted to textbook language

The company can generate cash for the business through the management of payables by managing the billing terms and understanding the need for payments to optimize the cash flow of the business. Additionally, the effective management of receivables and the sale of inventory helps generate more cash inflow for the business and thus improving the liquidity of the company.

Recommendation/Conclusion:

The business is valued and will be valued depending on the amount of cash the company generates. Therefore, it's important to ensure effective management of the company to improve some cash inflows and to avoid or rather minimize probable cash drains subsequently.

Describe the plans you have to handle negative cash flow?

Business owner/Manager’s Answer

Negative cash flows are handled through the analysis of the business’s expenditures and revenues to determine the unnecessary expenses that contribute to the financial inefficiency of the company. Additionally, the negative cash flows are counteracted through the implementation of appropriate strategies to help increase the revenues of the company, such as training the sales team to utilize better sales strategies.

Business owner/Manager’s answer converted to textbook language

Negative cash flow can be handled by the creation of the budget to help determine how much money the company generates, the amount of money spent and the amount left after paying off the expenses. Also, creating strategies to increase the business revenues will help counteract the company’s negative cash flow. For instance, the company may choose to train its sales team on how to utilize better sales strategies.

Recommendation/Conclusion

Negative cash flows affect the financial performance of the company. This is because the negative cash flow indicates the company's inability to generate more revenues than it spends. Therefore, it's crucial for the business to adopt appropriate counteractive measures to ensure positive cash flows prevails and company's financial position stays healthy.

Have you or your accountant completed a cash flow analysis for your business?

Business owner/Manager’s

Cash flow analysis has been done and completed in this company. The significance of the analysis was to determine the amount of cash that the business brings in and the amount the company spends over a given financial year. Consequently, the analysis was aimed at gaining an in-depth knowledge and understanding with regards to the economic health of the company.

Business owner/Manager’s answer converted to textbook language

The analysis of cash flows of the company is a vital tool of the accounting aspect as it provides further information regarding the accuracy of the cash flow and financial performance of the business. Cash flow analysis determines the amount of cash the business generates and spends during a given period, and thus help measure the efficiency of the company.

Recommendation/Conclusion

Cash flow analysis is a crucial accounting tool of business as it helps determine the amount of cash inflow and outflows of the company. This helps paint the accurate picture of the company’s financial performance. Therefore, regular cash flow analysis should be encouraged to help the business measure its performance to make improvements with regards to the company’s productivity if need be.

Describe the plans you have to increase cash flow for your business?

Business owner/Manager’s Answer

Increasing cash flow of the business is achieved by reviewing the credit requirements to determine the credit suitability of the customer before selling him/her product. The credit requirements help to determine if the client is having any cash flow problems and also assesses his/her ability to pay their bills on time. The increase in sales is also done to cash flow of the business better.

Business owner/Manager’s answer converted to textbook language

The cash flow of the business can be increased through various ways which include adopting practical methods of collection of receivables such as offering discounts to customers who make earlier payments, reviewing of credit requirements to evaluate the client’s suitability for credit sale and increasing sales. Additionally, the company can improve its cash flow through pricing discounts and secure of short-term loans.

Recommendation/Explanation

Securing of loans help the business counteract the short-term cash flow problems and thus increasing the cash flow of the company. Pricing discounts offer discount opportunities for clients who make earlier payments for the product. This practice may affect the profit margin of the business. However, it helps in the effective management of cash flows by providing incentives for customers to make earlier payments.

What is the importance of Cash Flow to a business?

Business owner/Manager’s Answer

Cash flow is an essential element in business that determines the financial health of the company. A steady cash flow ensures flexibility of the company especially when making critical decisions as it creates confidence in its financial performance and thus making it easier for the purchase of a product

Business owner/Manager’s answer converted to textbook language

A substantial cash flow position of the company provides comfort and the ability of the business to increase its investment growth such as building new locations and diversifying the business. It also creates confidence and flexibility when making a critical decision with regards to the business especially during the purchase of a product. Finally, it also allows the company issue dividends to the shareholders, and as a result, it helps strengthen the bond between the company and the shareholders.

Recommendation/Explanation

Cash flow is the net balance in the business's financial position for a given period. If the company can generate more income than it spends, then it will have a positive cash flow. The negative cash flows arise when the company's cash outflows exceed cash inflows. Cash flow is a critical element in determining the financial health of the business.