Cash flow is the lifeblood of any business—the cash that goes in and out of your company determines your financial position. In particular, managing how your cash flows in and out of your bank account depends on how you balance the timing of your cash collections from clients with cash payments to your suppliers.
Slow collection of receivables at a time when you need to pay your suppliers could give you unnecessary financial stress. You may need to borrow to bridge your working capital needs or you risk getting a credit downgrade from your suppliers.
On the other hand, if you collect efficiently but pay your suppliers too soon, you might incur significant opportunity costs. Managing your cash means you need to collect cash from your customers as soon as possible while paying your suppliers as slow as possible.
Measuring Cash Flow
To manage your cash, you need to project your cash flows over a period of time— weekly, monthly, quarterly or annually—to serve as your guide. Start your cash flow projection with the beginning cash balance for the month—use your latest bank balance from the previous month. How much of your accounts receivable do you expect to collect during the period? Do your customers pay by installments?
If so, how are the payments scheduled over the following weeks? How much of the sales are on cash basis? Do you require customers to pay down payments? If so, you also need to project your sales growth over the period to determine your cash collections.
After projecting cash receipts (or the cash flowing in), you will need to project your cash disbursements (cash flowing out). You can divide your cash outlays into non- discretionary and discretionary cash outlays.
Non-discretionary cash outlays are those that you are bound to spend during the period. These expenditures are salaries and wages, utilities, rentals and other operating expenses. You can also include here the schedule of payments to suppliers and amortizations to banks.