Cash flow management is the process of managing your business inflows (income) to satisfy all of its necessary outflows (expenditure). Sounds easy! Well it is actually one of the most challenging areas of business management.
A failure to effectively manage your business cash flow will lead to your inability to meet commitments when they become due causing a loss in suppliers, assets, customers and eventually your business.
Here are two key reasons managing cash flows are so challenging:
1. Inflows and outflows occur at varying times. This is to say you do not always receive income at the same time or prior to your commitments becoming due.
2. Inflows and outflows occur at varying values. This is to say you do not earn income equal to that of your commitments at a given time.
These two variables, time and value, make managing cash flows an art that many entrepreneurs have not yet mastered. Often entrepreneurs make the critical mistake of attempting to manage their cash flows without comprehensive, accurate financial records. This always results in challenges. Spending or committing to spend without an understanding of what the impact will be on your finances is poor financial management. You must have a comprehensive knowledge of your past, current and future financial position to make wise business decisions.