Metrobank’s Guide to Cash Flow Management for Businesses

Cash flow management is a critical part of any business. You need to ensure that you have enough cash on hand to cover your expenses while making sure that you don't have too much money tied up in assets. In this article, we'll discuss why is cash flow important and some tips for how to manage your cash flow effectively.

What is cash flow?

First thing we need to discuss: what is cash flow?

Cash flow is the movement of money in and out of your business. This includes active income and passive income. It's important to track your cash flow so that you can see how much money moves through your business over time. This will help you to gauge if your business has enough money to cover expenses, while also making sure that you're not overspending.

Is cash flow the same as earnings?

A common misconception people have is that cash flow and revenue are the same, but they aren’t. Earnings is the net amount of money that your business earns, while cash flow is the net amount of cash that flows in or out of your business.

So, just because your business earned PHP 500,000 in net income last month doesn’t mean that you actually have PHP 500,000 in cash on hand. Net income is just one of the sources that increases cash flow.

The key to successful cash flow management is to ensure that your business always has enough cash on hand to meet its operational needs. This can be a challenge, especially for businesses that are growing quickly or have irregular revenue streams. But with careful planning and execution, it is possible to manage your cash flow effectively and avoid any nasty surprises down the road.

Why is Cash Flow Important?

Cash flow is important for businesses of all sizes, but it is especially critical for small businesses. This is because small businesses often don’t have the same access to capital as larger businesses. They also tend to have thinner margins and less cash on hand to weather unexpected expenses.

That being said, cash flow management is important in business continuity. If your business doesn’t have enough cash to meet its financial obligations, you could find yourself in hot water very quickly. In extreme cases, businesses that mismanage their cash flow can even be forced into bankruptcy. Another way to keep your business afloat or increase cash flow is through financing activities such as taking a loan. The cash from a loan can then be used to generate more income or be used to pay-off operating expenses.

If you have too much cash flow, on the other hand, you may find yourself sitting on a pile of cash that’s not doing anything for your business. While it’s always good to have some cash reserves, you don’t want to keep so much cash idle. After all, that money could be put to better use if it was reinvested back into the business or used to pay debts.

How to track cash flow

The first step in effective cash flow management is to track your cash flow. The most important thing is to choose a method that works for you and your business. Here are ways on how you can track your business’ cash flow:

Use an accounting software

There are a number of accounting software programs that can help you track your cash flow. This information can be used to create a cash flow forecast and to monitor your actual cash flow.

Track payments and receipts

You can also track your cash flow by manually tracking payments and receipts. This information can be used to create a cash flow statement, which is a summary of your cash flow for a specific period of time.

Review your bank statements

Your bank statements can also be used to track your cash flow. This information can be used to reconcile your actual cash flow with the amount of money that you have in your bank account.

How to Manage Your Cash Flow Effectively

Once you have a clear idea of your cash flow, you need to learn how to manage it so you can utilize the money you have. By following these tips on managing cash flow effectively, you can ensure that your business has the cash it needs to meet its financial obligations and avoid any potential disruptions.

Create a cash flow forecast

Once you have your cash flow, you need to make a cash flow forecast, which is a tool that can help you predict how much money will come in and go out of your business in the future. This information can be used to plan for potential shortfalls or surpluses in your cash flow.

Have a line of credit in place

A line of credit is an arrangement with a financial institution that allows you to borrow money up to a certain limit. A good example of this is a personal loan where one of its many benefits is that it can be used to cover short-term cash flow needs such as inventory purchases or unexpected expenses.

Use invoicing and payment terms to your advantage

You can use invoicing and payment terms to improve your cash flow management. For example, you can offer discounts for early payments or extend terms to give yourself more time to collect from customers.

Improve Your Cash Flow Management with Metrobank

Managing your cash flow is essential to keeping your business afloat. In this article, we’ve outlined some tips for improving your cash flow and avoiding common pitfalls. Metrobank’s online Personal Loan is quick way to support cash flow since it can be used for any purpose. When combined with effective cash flow management, a personal loan can help businesses expand or extend their lifeline.

Check out the other articles we have on Money Basics for more information on how to manage your finances and keep your business growing.