Cashflow Management: Secret of Successful Businesses


What drives a business to its success is its effective and productive financial management. If your company progressively handles the incoming and outgoing funds, you can have a high-profit ratio from investment and sales. However, effective cashflow management is not as easy as it sounds. But what if you learn the trick that successful businesses use?

In this guide, we have gathered information after analyzing the financial strategies of various successful businesses. Moreover, we have talked to the leading businessmen, analysts, and experts to give you the top 6 secrets successful companies use to progress. We will also tell you the challenges you might face while implementing these techniques. So, without further waiting, let’s start!

Cashflow Management: Overview

Managing your company’s cash flow is vital to sustain the business in every condition. It includes tracking your financial status, revenue streams, income values, expenses, and salaries. Cashflow management is not a one-time job. Instead, you need a dedicated team or an expert person in your finance department to monitor, analyze, and manage your income and expenses.

To manage your company’s cash flow properly, you need to factor in several aspects. Usually, your company’s accountant will be enough to handle all these factors, but you should also keep track of a few things. These include analyzing previous financial data, creating cashflow statements, making short-term and long-term forecasts, planning the budget, managing debts, controlling funds reserves, and other similar sectors.

Importance of Managing Cashflow

Monitoring and controlling cashflow determines the success and failure of a business. With a proper structure, companies can create progress benchmarks and leave their competitors behind. In contrast, they may collapse or shut down if the strategies are poor and not productive. According to Statista, 44% of startups and businesses failed in 2022 only because they ran out of cash. Hence, tracking your business money is extremely vital.

With adequate management, you can easily pay your bills and hold on to essential platform subscriptions. It helps you to save enough money so you can invest it in the company’s growth and sales channels (such as marketing). You can not only pay your employees salaries but also keep your business stable financially. And after all, it prevents bankruptcy chances and saves you from debt.

6 Business Secrets

Cashflow Management Secrets

As you understand why cashflow management is crucial for your company, you may like to know how successful businesses maintain it. Working on your company’s revenue and expenses sounds easy, but it is one of the most complicated ordeals. So, here are a few secrets of successful companies that not only bring them sales and cut expenses but also allow them to rise above competitors financially.

1. They Understand its Types

First, cashflow is not a single term. Instead, it is subdivided into three categories. Productive businesses understand these types and distribute their cashflow smartly in different sectors. Below, each type is explained in detail. Learn about each category to strategize your money movements profitably.

Operating Cashflow

The Cash Flow of Operations (CFO) is the overall cashflow to keep the business operating. It indicates whether the company has enough funds to pay the next bills and salaries and make purchases. This category comprises two factors:

  • Cash Inflow: These are all the means through which money comes into the business, such as sales, funding, or external investments.
  • Cash Outflow: These are all the means through which money goes out of the business, such as bills, wages, taxes, and purchases.

For a sustainable company, the inflow amount should always be higher than the outflow. Otherwise, the company may collapse. You can estimate your CFO by using the formula:

Operating Cashflow = Net Income + Amortization + Changes in Working Capital

If the value is positive, Congratulations! Your company is doing well. Make sure the value to not too small. Also, ensure it increases every month.

Investing Cashflow

The Cash Flow of Investment (CFI) refers to the revenue generated or spent on investments, assets, or financial items that are not a part of the company’s core operations. This category describes a business’s capital experiments and expenditures on long-term values. The amount spent or received through these channels is not directly from the company’s business, but it can affect the financial status. Again, it has the same two factors:

  • Cash Inflow: This gain consists of the funds received by selling an outside property or asset such as stocks or bonds.
  • Cash Outflow: This expense consists of the purchasing of outside property, stock, or bonds.

The CFI acts in pairs. If you have purchased another company’s stocks, you are making an outflow investment. Years later, when you sell the stocks (presumably for profit), you make an investment inflow. The CFI outflow activities can be great in many terms.

If you suspect a property or stock will progress in the future, you may invest in it. Your company may not have any use for the item’s investment. But, if it yields profit, the revenue can save you in a difficult time. The only thing that matters is an observing and forecasting eye. It also has a formula for value estimations:

Investing Cashflow = Capital Expenses + Investments Purchase Cost + Company Assets – Divestitures

Remember, CFI can also be positive and negative, whereas the latter case is bad. Only invest your company funds if you are sure or have strong guts feeling for the profit.

Financing Cashflow

The Cash Flow of Financing (CFF) describes the in and out of funds through financing means. In other words, these are the expenses and income for funds that keep the company operational. Hence, the CFO depends on the CFF, as the latter determines whether the company will have enough funds from its financing sources.

CFF is also crucial for the business since the team needs to include this cashflow in their pitch decks. So, the cashflow management for financing activities will be apparent to the investors, affecting their decisions on whether the company has a strong financial condition and should invest in the business. To manage CFF, here are the two considerable factors:

  • Cash Inflow: This cashflow includes income from investors of other partnering companies, new product launches, and business loans.
  • Cash Outflow: This cashflow includes the repurchasing of shares, payments to shareholders, or repayment of loans (plus interests).

Make sure your inflow is significantly greater than your outflow to develop investor’s interest in your business. Anyways, like the above two categories, you also have a formula for an estimated CFF value.

Financing Cashflow = Equity Issuances + Debt Issuances + Shareholder’s Cut + Loan Repayment + Dividends

2. They Track Invoices & Inventory

Tracking your invoices for pending payments from customers is vital to know when you will increase your company’s balance. Keeping a close eye on invoices allows a business to monitor how much a customer owns to the business. For this purpose, don’t wait to send your invoices to the buyers. One way to do it is by automating the process. But sending invoices will not be enough.

You should also establish an effective tracking system to identify overdue invoices. It will reduce the risk of unpaid or delayed invoices, which can strain cashflow. Also, it will help you to learn about a customer’s creditworthiness. This way, you can maintain positive and good credit terms, which will eventually lower the risks of bad debts with high interest.

On the other hand, tracking your inventory is equally essential to manage cash flow. When you learn about your inventory, you can easily manage its working capital by keeping its level above a sufficient point. It will also help you in cashflow management of the item purchases since you will balance the volume between unsold goods or out-of-stock signs.

3. They Always Keep a Backup Reserve

Cashflow Management Backup

Backup reserves, or emergency funds, are like insurance that can save a crumbling business in difficult times. No matter how successful a company gets, it always keeps an emergency reserve in its banks. The amount is sufficient enough to pay salaries, bills, and taxes for a couple of months. Some companies also collect enough amount to keep the operations running during low sales for at least three months.

Similarly, your businesses may face unexpected expenses, such as equipment breakdowns, repairs, legal issues, or unforeseen market disruptions. We hope it never happens, but what if it does? In that case, a backup fund provides a cushion to cover these unexpected costs without disrupting regular cashflow management.

Calamities or disasters are the most common use-case scenario where these funds kick in to maintain the cashflow. These can include several situations, such as floods, earthquakes, fires, public emergencies, or pandemics (like COVID-19). The backup reserves help in keeping the operations running in such situations.

Otherwise, they can also help in experimental investments, such as trying out new products, locations, or strategies. However, ensure you don’t utilize the funds too much so they can replenish quickly.

4. They Lease for Short Term Needs

Whenever a company needs equipment, tools, or software, it usually purchases the item or subscribes. Although it is a good step since the item may come in handy later, it’s not always the best solution. What if you don’t need it at all? In this situation, successful companies usually lease the item if they require it for a short term.

Leasing typically involves lower upfront costs than purchasing, preserving funds for other essential operations. It is particularly important for businesses with limited working capital. In contrast, if you purchase a product, you will have to spend on its maintenance to keep it in working condition. So, you will be spending its funds on a piece of equipment that it is not even using.

On the other hand, products can lose value over time, which is not good. In this situation, you will be suffering a loss without even utilizing the item properly. Leasing lowers this risk as you only pay for its time in your business’s possession. Additionally, leasing items are typically not taxable, improving your cashflow further.

5. They Constantly Re-evaluate Plans & Strategies

Running a company doesn’t mean you develop a great plan and stick to it. Instead, you have to analyze the market trends and constantly update the strategies. It includes re-evaluating your financial plans and making amendments accordingly. No matter how great your plan or strategy is, it will eventually become outdated. It will only resile if you make progressive modifications on time.

For this purpose, you have to track and analyze the market frequently to catch its rapid changes. For instance, if you observe a decrease in a particular strategy, search for the improvement areas. If you come up with new ideas or opportunities, don’t hesitate to implement or try them. By constantly re-evaluating your cash flow plans, you can position your business on a progressive track.

On the other hand, you can also address the various issues that demand timely action. These factors include customer demand, supply chain disruptions, economic downturns, and other downgrading factors. Plus, you can align your financial goals according to the changes and keep up with the pace of progress.

6. They Re-Invest From Profit

Many businesses make the mistake of cashing out all the profit. Or they only re-invest an amount sufficient enough to yield the same profit. Don’t repeat it. Instead, try to invest all the profit (keeping a cut of expenses aside). In this case, you will be making more money from each re-investment. If you want to avoid such a mistake, check out our other blog on mistakes that young entrepreneurs make in a startup.

When a business reinvests from profit, it is using its own money to finance its growth. This way, it can invest in new products or services, expand into new markets, or acquire new assets as the company flourishes. By reinvesting from profit, you can reduce reliance on debt, which can save money on interest payments and improve the business’s credit rating.

Moreover, it significantly improves cashflow management. When you invest in new products or services, it creates new revenue sources. It helps to increase the overall cash flow and makes it easier to meet its financial obligations. But make sure you make a balance between reinvesting from profit and paying out dividends to shareholders.

Common Cashflow Management Issues

Cash Flow Issues

Although we’ve shared with you some tips and tricks that successful businesses use in their cashflow management, your company’s success is still not guaranteed. You may face several issues that can impact your financial condition or affect your cash flow. Some of those issues are mentioned below:

Late Customer Payments

It doesn’t matter how greatly you plan your financial situation and structure your budget, it will eventually be disrupted if the customers pay late. When they do not pay promptly, your company may struggle to meet financial obligations, such as paying suppliers, employees, or bills.

Overhead and Fixed Costs

High fixed costs, such as rent, salaries, and loan payments, can make your cashflow tight and complicated. You must keep a keen eye on these expenses and pay them regularly, regardless of the business’s sales performance. Otherwise, it will damage them tremendously.

Insufficient Working Capital

Inadequate working capital can lead to difficulties in covering day-to-day operational costs. The situation is still tricky even if you have strong sales, but payment cycles are long. Make sure you manage the capital circulation efficiently.

Uneven Revenue Patterns

Several businesses suffer from fluctuating or seasonal revenue. Your company may also experience such cashflow shortages during low-sales periods. Hence, you need to analyze your sales and take the most out of them to manage cash reserves effectively. It will help you cover expenses during low times. Otherwise, try to streamline the revenue generation.

Poor Accounts Management

Sometimes, you have a strong cashflow management plan, but the accountant or manager is not fit for the position. If you have recently been hired, don’t press the person with critical responsibilities. Make sure you only hire the right person for the job.

Market Shocks Before Setting Emergency Funds

The most unfortunate situation is that your business market suffers or crashes even before you solidify your steps. Although it is a rare situation, it is possible—one example of Covid-19. In this case, it is better to get a fresh start rather than wasting the remaining funds on a dying business.

Wrapping Up

Managing cash flow is extremely crucial for a company to sustain its business. Without a proper structure, the business can crumble to a shutdown stage in no time. Luckily, you have learned the six secrets of successful companies in cashflow management that have taken them to new progressive heights.

You have to understand different cash flow types to manage each one effectively. Next, you have to track your invoice and inventory and create an emergency reserve. Plus, if you need something for the short term, lease it rather than purchase it. Lastly, re-evaluate your financial strategies constantly and re-invest your profit into the business.

But implementing these secrets may encounter some issues too. However, you know which one they will be. Hence, you can tackle them easily. So, walk on the path that other successful businesses have walked on, and establish your business into a brand.

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