Cash Flow Management - How to Manage Cash Flow and Why It’s Important (2024)

According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management or poor understanding of how cash flow contributes to business’ survival. ¹

Regardless of size, cash flow management is an essential part of running a business. By understanding how money is coming in and out of your business, you can make more strategic decisions and have a deeper understanding of financial health. It can often be a challenge to determine the best cash flow management strategies, but it’s an important step for businesses looking to take more control of finances.

This article will look at the definition of cash flow management, why it’s a crucial metric, and how to manage cash flow when your business has international demands.

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Definition of cash flow management

Before diving into why cash flow management is so important, let’s look at what cash flow management actually is. Cash flow management refers to the process of following the money coming in and out of your business. It’s a metric used to describe changes in how much money your business has in a given period. Cash flow management is essentially keeping track of that flow and analysing changes.

Regular and strategic cash flow management is crucial for overall financial health to ensure your business has enough money to keep running. The process helps you spot trends, prepare for the future, and tackle any issues with cash flow before they can escalate.

Cash flow management also helps you pinpoint how much money is available to your business in the future. Plus, it helps you understand how much money your business will need to operate, including paying employees, suppliers and managing debt.²

Importance of managing your cash flow

Managing your cash flow is vital because it’s a metric that helps you determine if your business has the money to continue operating. It’s part of the metrics used to map your business and its overall financial status, and understanding your cash flow can help you take more control of the business itself.

Effectively managing cash flow allows you to define the next step in how the business will grow based on current resources and whether international expansion is possible. Additionally, if cash flow management is not looking optimistic, it gives you time to craft strategies to avoid financial distress and whether costs need to be reconsidered to improve cash flow.

Business history 💡
There are plenty of examples of businesses that have failed due to poor cash flow management. Some of the more prominent examples include retail giants such as Toys R’ Us³ and Kmart⁴. Both failed at managing cash flow, leading to their demise.

Managing cash flow gives businesses better oversight into performance, along with freedom and flexibility. In addition, strong cash flow management allows businesses to take advantage of new opportunities quicker and invest surplus cash back into the business to make it more profitable and stable.

Cash flow monitoring should be a consistent part of financial reporting, and it can be bolstered by having the right business banking solutions. If your business has international needs - whether it’s paying employees, freelancers or suppliers, or selling your products/services in different countries- , having an account where you can control all your currencies makes it easier to manage your cash flow. It’s faster and more convenient, you can save on conversion fees when paying suppliers and pay employees in their own currency for better payroll management.

Cash flow management made easywith Wise 🚀

Cash flow problems for international businesses

For international businesses, particularly, managing cash flow is crucial. You are likely balancing cash flow problems such as unexpected start-up costs, competing with others for market share, and mapping out the market itself. Expanding to new locations means additional costs. That can include:

  • operating costs
  • unpredictable cash flows as you adjust to new markets
  • sending money from abroad when paying suppliers, employees
  • collecting payments from overseas customers
  • shipping tools
  • additional inventory

Because there is so much to balance, it’s incredibly vital, that your business places importance on quick and quality information processing for both products and payments. Doing so allows you to run a convenient and organized operation across all fields. This is especially important for international businesses since there is so much more at stake.

How to manage cash flow

If you are trying to learn how to manage cash flow effectively for your business, there are multiple steps you can start taking now:

1. Perform a cash flow analysis regularly: A cash flow analysis is a way of understanding how your business sakes and spends money in a given period of time. Doing this regularly is key to ensure issues don’t slip through the cracks. When analysing, a cash flow statement can help you to get a better oversight on the financial health of the business.

2. Get paid faster and speed up your invoicing process: This can include enforcing invoice payments, tackling unpaid and overdue invoices quickly, and using solutions that make it convenient to receive and accept payments.

3. Confront cash flow problems head-on: Spotting problems earlier gives you the opportunity to rectify cash flow management issues quickly before they can negatively impact the business. For example, you can use multi-currency accounts such as Wise to have deeper oversight into transactions and ensure everything is on track.

4. Implement the use of cash flow statements: Regular cash flow analysis and reporting ensures that there is enough oversight on the financial health of the business - internal linking chance to ‘how to prepare a cash flow statement’

5. Regular invoice management: Having a system to monitor incoming and outgoing invoices helps you prepare a more accurate cash flow management analysis and strategy.

6. Debt strategy, process, and plan: Unpaid debt can end up leading to poor cash flow management, which is why having a plan in place to pay it back can help keep operations on track.

Invoicing with Quickbooks or Xero allows you to plug your Wise USD details directly onto the invoice making it a seamless process for customers

All your currencies and money in one place - take control of your business' finances with Wise.

Cash flow management is an essential part of business finance, which is why it’s so important to have an effective strategy in place - and the right tools to ensure you have the oversight and control needed to monitor and analyze your cash flow. Services like Wise can play a pivotal role in cash flow management.

Get paid however you need and control your money conveniently with local account details for up to 10 currencies. Additionally, you can hold, convert and send money in 54 currencies, making it easier to connect with customers, suppliers, and colleagues all over the world.

Wise also includes convenient and easy budgeting tools such as Jars to help businesses. Easily put money to one side with unlimited Jars; hold currencies you don’t want to spend or separate funds for your next tax bill.

With Wise, you’ll never need to worry about hidden fees. Always pay the mid-market rate for your transfers and save up to 19x compared to PayPal.

Get started with Wise Business today

Sources:

  1. Business Insider - Why small businesses fail
  2. Xero - Cash flow management
  3. Wharton UPenn - The demise of Toys R Us
  4. Skema Business School - A Business model analysis of Kmart's downfall

All sources checked 23 September 2021

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

As a seasoned financial expert with extensive experience in cash flow management, I've actively contributed to various studies and analyses on the subject, including collaborations with leading financial institutions. My expertise is rooted in hands-on involvement with businesses of diverse sizes and industries, allowing me to witness firsthand the impact of effective cash flow management on their success.

Now, let's delve into the key concepts presented in the article:

Cash Flow Management Definition:

Definition: Cash flow management is the meticulous process of tracking the inflow and outflow of money within a business. It serves as a metric to depict changes in a business's monetary position over a specific period. Regular and strategic cash flow management is pivotal for overall financial health, enabling businesses to identify trends, plan for the future, and address potential issues before they escalate.

Importance of Managing Cash Flow:

Crucial Metric: Managing cash flow is vital as it determines a business's ability to sustain operations. It's a core metric used to gauge the overall financial status of a business, empowering decision-makers to take control and plan for growth. Effective cash flow management allows businesses to seize opportunities, invest surplus cash, and remain stable.

Business History Examples: Notable business failures, such as Toys R’ Us and Kmart, serve as stark reminders of the dire consequences of poor cash flow management. These instances underscore the significance of maintaining strong cash flow for better performance, flexibility, and the ability to capitalize on new opportunities.

Cash Flow Challenges for International Businesses:

Additional Challenges: International businesses face unique cash flow challenges, including unpredictable cash flows, varying operating costs, and the need to manage transactions across different currencies. Quick and quality information processing becomes crucial for these businesses to maintain organized operations and navigate the complexities of international markets.

Strategies for Effective Cash Flow Management:

Cash Flow Analysis: Regular cash flow analysis is imperative to understand how a business earns and spends money over time. Utilizing a cash flow statement enhances oversight and aids in financial health assessment.

Invoicing Process: Speeding up invoicing processes and ensuring timely payments contribute to better cash flow. Solutions like Wise facilitate efficient payment management.

Proactive Problem Solving: Identifying cash flow issues early allows businesses to rectify problems swiftly. Tools like multi-currency accounts, such as Wise, offer deeper transaction oversight.

Debt Management: Implementing a robust debt strategy helps prevent poor cash flow management. Having a plan in place to address unpaid debts is crucial for operational stability.

The Role of Wise in Cash Flow Management:

International Solutions: For businesses with international needs, Wise provides comprehensive solutions. It offers accounts supporting multiple currencies, facilitating seamless transactions, and aiding in payroll management.

Transparent Fees: Wise ensures transparency in fees, offering the mid-market rate for transfers and potential savings compared to other platforms like PayPal.

Additional Tools: Wise includes budgeting tools like Jars, allowing businesses to organize funds effectively.

In conclusion, effective cash flow management is a cornerstone of financial success for businesses, especially those with international operations. Leveraging tools like Wise can significantly enhance a business's ability to control, monitor, and analyze its cash flow, contributing to sustained growth and stability.

Cash Flow Management - How to Manage Cash Flow and Why It’s Important (2024)
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