Managing Cash Flow

'Cash is King', is an old saying which describes the importance of cash in running a business. It basically means that cash flow is at the heart of a business and is a vital element for success of any business.

Good cash flow management entails ensuring that you have more incoming cash than outgoing. Positive cash flow arises when the cash coming into your business from capital, sales and other revenue sources is more than the cash going out through expenses, salaries, etc. Negative cash flow arises when cash outflow is greater than cash received. This generally is a problem for the business that management must grapple with. It is evidenced by:

  • Late or non-payment of suppliers, salaries, taxes and other essential business related expenditure.
  • Inability to fulfill customer demands in a timely manner.
  • Threatened or real legal action by suppliers at the extreme.
  • High stress levels across the business.

Read MoreLet us first of all deal with the common causes of negative cash flow:

1. Business is Unprofitable

Company is making losses due to declining sales, low gross profit margins, uncontrolled expenditure, excessive borrowing hence high interest charges etc.

2. Over-Trading
This occurs where a business is expanding rapidly and the expansion is funded from working capital.

3. Poor Credit Management
If you are selling on credit without proper credit approval and collection process, it will take long to turn a sale into cash and in the worst case, some debts will prove uncollectable.

4. Overstocking
Holding excessive levels of stock ties up cash besides the risk of some stocks becoming obsolete in your hands.

5. Capital Expenditure from Working Capital
The returns on assets such as equipment, motor vehicles, buildings etc are long-term. Funding such items out of short-term funds causes a cash flow mis-match and contributes to negative cash flow.

6. Taking cash out of the business
This could be due to the business owner making excessive personal drawings or funding purchase of personal assets. Another reason could be revenue/cash leakage to inadequate controls over cash.

In the next few newsletters, we will look at actions that business owners or management can take to address these circumstances and hence ensure a positive cash flow.

For Financial Advisory Services, contact Daniel Muhia on This email address is being protected from spambots. You need JavaScript enabled to view it.