In this article, we will explore the advantages of cash flow management. Since it is not for nothing that "cash is king", cash flow appears in many areas of a company and plays a key role in its success.
Advantages of cash flow management explained
The advantages of cash flow are numerous; after all, it serves nothing less than maintaining liquidity. That is why cash flow is of particular importance.
If a company has high revenues, this corresponds to a high incoming cash flow. It can use this to pay its bills, pay its employees on time and buy supplies or goods to keep the day-to-day business running.
A high incoming cash flow also reduces the risk of having payment problems or having to tap your reserves to pay an invoice. Keeping this cash flow flowing constantly is therefore a central component of financial management, because only in this way is long-term growth possible.
Advantages of a cash flow statement
The cash flow statement shows how high the cash flow was within a certain period of time. It shows how high the income and expenses were in the past months or business years. It is mainly used by companies to analyse and optimise their cash flow.
By comparing the cash flow statements from previous years, it is possible to see, for example, how income developed in relation to expenditure. This can provide insights into process efficiency.
For example, if revenues have increased more than expenditures, this is an indicator of increased efficiency. If, on the other hand, expenses have increased more than income, efficiency has decreased. In this case, research can be done to find out why expenses have increased, which in turn is the starting point for optimising costs.
Advantages of cash flow analysis
Cash flow analysis has several advantages. On the one hand, it serves to ensure that companies are always up to date with their cash flow, and on the other hand, it ensures that costs do not get out of hand.
A detailed cash flow analysis compares all income and expenses within a certain period of time (e.g. within one month). Subtracting the expenses from the income gives the ending balance, which is either positive or negative, representing a surplus or a deficit.
With such a comparison, those responsible can see how the cash flow has developed over a period of time. They can use this as a basis for their cash flow planning.
Advantages of cash flow budget and forecasting
With the help of cash flow forecasting (also called cash flow budget), those responsible look into the future. Similar to the cash flow analysis, the income and expenses are compared, but not the past ones, but the expected ones.
With the help of the analysis, one can project recurring income and expenses into the future; for everything else, experience and estimated values can be used. In this way, a realistic picture of future cash flow can be drawn.
A cash flow budget shows managers whether they will have enough cash available to cover costs in the coming weeks or months. Thus, the forecast is an important tool when it comes to recognising liquidity bottlenecks at an early stage. Companies then have more time to prepare for the bottleneck and can counteract it at an early stage.
If the company expects high cash flow surpluses in the following months, it can also consider at an early stage what it wants to use them for. The forecast therefore helps those responsible in planning so that the available liquid funds can contribute in the best possible way to the success of the company.
Advantages of a cash flow management software
Many companies use Excel for their cash flow management because it is usually pre-installed on the computers. However, if you want to be as precise as possible in your cash flow analysis and forecast, it is almost impossible to do this with Excel. All income and expenditure must be entered manually. This is not only error-prone, but also time-consuming - and rarely up-to-date, because the cash flow changes hourly in some companies.
A great advantage in cash flow management is therefore the use of special software that connects directly to the company's bank accounts and automatically retrieves the transactions from there, as well as updating the cash flow planning based on them. This saves companies a lot of time and those responsible can make important decisions more quickly because they are always looking at an up-to-date and accurate cash flow.
