What is cash flow? 5 easy steps to plan cash flow

Cash flow is a term that is already too familiar in the field of corporate finance, this is an important issue that directly affects the existence and development of every company or business. So what exactly is cash flow, how do get the best plan for this problem? Please refer to the article below to get yourself the most accurate and detailed answer.

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What is the concept of cash flow?

Cash Flow by professional definition is cash flow, it can be cash flow or some cash in the business used in each period of financial analysis to show the change of cash account in that business. After summarizing, the cash flow is complete and detailed in the monthly, annual, or periodical reports at the request of the company’s superiors.

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Based on the cash flow statement, you can recognize the outstanding cash-related problems in the company, thereby capturing the financial situation as well as the business activities of the business. If the amount spent is less than the total cash in, it means that Cash Flow is positive, and vice versa, the company’s cash flow is negative.

Managers must have a problem-solving orientation after observing and analyzing the accounting statements so that the business operations of the enterprise can be favorable, meet the current and more developed debts.

Classification of cash flow in the financial sector

For those who study finance, this is too simple, but for those who are “introductory” or want to learn more, it is still quite vague. According to specialized knowledge, Cash Flow is divided into 3 types, each type will have its characteristics, specifically as follows:

  • Operating cash flow: Calculated based on actual results from business performance, this is the cash flow that investors pay the most attention to.
  • Investment cash flow: Calculated based on the company’s activities, areas of investment, or acquisition, from here the enterprise will analyze and decide whether to invest more or reduce investment for an item or some aspect.
  • Financial cash flow: Calculated based on business activities such as debt repayment, borrowing capital, stock issuance/repurchase, dividend payment, etc..

See also: What is joint venture? What are the benefits of joint venture?

Five steps of business cash flow planning

The cash flow planning for the business plays a very important role, based on this to determine the cash outflow and cash flow of the business in a certain period. As a result, businesses can calculate the excess and lack of money in the process of business and operation to provide effective directions, balance the revenue and expenditure in cash for the company and business.

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Make forecasts for cash inflows

Cash inflow will come from 3 sources:

  • Business activities come from revenue-generating activities such as sales, service provision, debt collection, etc.
  • Financial investment activities: money issued for shares, money raised from borrowing capital, money from owners contributing capital in cash, etc.
  • Investment activities: proceeds from investment, interest, loans, liquidation/sale/transfer of fixed assets….

Make forecasts for cash outflow

Cash outflows will include business expenses, specifically:

  • Expenditure on business activities: interest payments on capital loans, payments to the state budget, advertising and marketing expenses, service fees, materials investment, wages, input expenditures are generally the main revenue-generating activities of the enterprise.
  • Spending on investment activities such as loans, capital contribution, purchase of fixed assets and equipment, construction of infrastructure, etc.
  • Spending on financial activities such as money to buy issued shares, pay investors, loans/financial leases, etc.

Calculate the net cash flow of the business

The difference between the two cash flows in and out in a certain period is the net cash flow of the business, based on this cash flow will see whether Cash Flow is positive or negative to make adjustments as well as suitable direction.

Determine the amount of excess or deficiency at the end of each period

Based on the excess or lack of cash at the end of each period, compare it with the necessary cash balance in the enterprise to come up with an adjustment plan, in which: Closing balance = opening balance and net cash flow in the period.

Provide treatment solutions

Perform analysis and offer solutions to the shortage or excess, if there is a shortage, there should be specific solutions to rebalance the cash in and out, if there is an excess of money, the business can consider investing in it invest more to make a profit.

Five ways to help businesses improve cash flow

Any business wants cash flow to always be positive, so finding ways to improve Cash Flow is always a top priority. To do this, businesses need to keep in mind 5 extremely important ways below:

Reduce purchasing costs

This is the first way for businesses to improve cash flow efficiency, compare and consider finding suppliers with low cost of raw materials and reduced input costs.

Increase sale revenue

Usually, businesses will choose to reduce prices to increase the sales budget, but not all companies can offer a high discount. According to the survey, a 25% reduction would be more reasonable, because they are enough to stimulate consumers to decide to purchase or use a service.

Note, only discount some popular items, not all items, to ensure increased sales.

Offer multiple payment methods

The diversification of payment methods will create favorable conditions for both customers and businesses because the trend of consumers paying via credit cards, internet banking, and apps is increasing.

Besides, businesses can also apply purchase methods such as installment payments to attract buyers, this method also contributes to increasing sales, improving Cash Flow for businesses.

Provide an effective inventory management method

Controlling inventory is a necessary job because if the quantity of goods in stock is high, it means that the business is having problems in the consumption stage, working capital is frozen, old goods do not go, new goods will not be available storage place. In the case of multi-sided inventory, businesses need to plan to consume quickly and efficiently.

Recovery of company debts

Conduct inspection of debts that businesses need to collect, customers’ debts then seek to recover as soon as possible to increase capital and stabilize cash flow.

Above is some information about the term Cash Flow, hopefully, through this sharing, you will know what Cash Flow is as well as the cash flow planning steps and how to improve cash flow effectively. As a smart person, equip yourself with useful knowledge to be able to best manage your business, wish you success!

See also: What is dividend and how they are paid out

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