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 💡 |
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| 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.
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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 |
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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.
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Sources:
All sources checked 23 September 2021
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I'm an experienced financial expert with a deep understanding of cash flow management, having worked extensively in the field of business finance. My expertise is demonstrated by hands-on experience and a comprehensive knowledge of financial metrics. Now, let's delve into the key concepts discussed in the provided article:
1. Definition of Cash Flow Management:
Cash flow management refers to the process of monitoring the inflow and outflow of money within a business. It involves analyzing changes in the business's financial position over a given period. Regular and strategic cash flow management is essential for overall financial health, helping businesses understand the availability of funds for operations, payments, and debt management.
2. Importance of Managing Cash Flow:
Managing cash flow is crucial for determining a business's ability to continue operating. It provides insights into the business's financial status, allowing for better control and decision-making. Effective cash flow management enables businesses to spot trends, plan for the future, and address potential issues before they escalate. It also plays a vital role in defining the next steps for business growth.
3. Historical Examples of Business Failures Due to Poor Cash Flow Management:
The article highlights examples of well-known businesses like Toys R’ Us and Kmart that failed due to poor cash flow management. This historical context emphasizes the importance of proper cash flow management for sustained business success.
4. Cash Flow Problems for International Businesses:
For international businesses, managing cash flow becomes even more critical due to factors like unexpected start-up costs, market competition, and additional costs associated with operating in new locations. Quick and quality information processing is emphasized to run an organized operation across various fields, particularly when dealing with multiple currencies.
5. Strategies to Manage Cash Flow:
The article suggests several strategies for effective cash flow management:
- Regular cash flow analysis.
- Accelerating the invoicing process to get paid faster.
- Proactively addressing cash flow problems.
- Implementing cash flow statements for better oversight.
- Regular invoice management.
- Developing a debt strategy, process, and plan.
6. Importance of Tools in Cash Flow Management:
The article advocates for the use of tools like Wise for businesses with international needs. Wise offers features such as multi-currency accounts, quick and convenient money transfers, and budgeting tools like Jars. The emphasis is on having the right tools to ensure effective oversight and control of cash flow.
In conclusion, understanding and effectively managing cash flow are integral components of maintaining a healthy and sustainable business. Businesses, especially those with international operations, can benefit significantly from adopting proper cash flow management strategies and utilizing tools that facilitate efficient financial operations.
