Understanding Cash Flow and Cash Management [Blog]

January 6, 2017 Chris Doxey

Poor cash management is a telling sign of a company under pressure. An organization’s cash flow is analogous to a heartbeat; paralleling the inflow and outflow of cash. And just like a heartbeat is a way to gauge health, cash flow can be used to measure the overall health of an organization.

 

Background

Remember Accounting 101? As a refresher, know that positive cash flow refers to more cash entering an organization than leaving—as accounting books may put it: inflow cash exceeds outflow.

Negative cash flow refers to the opposite—outflow cash exceeding inflow.

Make no mistake; cash flow shouldn't be confused with inventory or accounts receivable. Nor should it be confused with profits or property. Simply put, cash flow is liquid—it’s money in the bank. It’s money on hand ready to pay for those unforeseen events.

 

Components of cash flow

An organization’s cash flow statement is divided into three sections:

  1. Operations—Commonly referred to as working capital. This is the cash generated from day-to-day operations. It comes directly from the sale of goods or services the company produces.
  2. Investing—Investing cash flow is generated from non-operating, non-day-to-day activities. This is usually in the form of investments in equipment, non-recurring gains or losses, or other sources outside of normal operations.
  3. Financing—This is the cash coming from and going to external sources. Examples include of which would be new or repayments of loans, issuing more common stock, and the payout of dividend.

 

Managing cash flow with good business practices

Managing a company’s cash flow—or any entity’s cash flow—is akin to conducting an orchestra; requiring several components playing in harmony with one another. From controlling disbursements to covering shortfalls in anticipated revenue; from investing idle funds to forecasting future cash needs, CFOs, controllers, and treasurers are the maestros in the finance department.

What’s more, when playing for a global audience—aka global cash management—these financial conductors must sing a tune that harmonizes with international tax and accounting regulatory agencies.

Here are five cash flow management tips (in no particular order) you can put to work in your organization:

  1. Improved investment strategies
    You don’t make investment choices based on a hunch, so why would you leave corporate investment open to interpretation? Articulate expectations for what acceptable investments should look like. 
    A clearly written investment policy should state which investments are and aren’t acceptable. A few topics to review in the investment policy should include which accounts are available for investment, frequency in re-evaluating investment portfolios, and how to re-invest dividends.
     
  2. Accurate forecasting models
    Business analysts in the past would have to keep several forecasts readily available—be it yearly, quarterly, monthly, or daily. What’s more, these forecasts would have to be easily accessible. And because of the complex nature of data embedded in disparate departments, compiling accurate forecasts was a difficult and time-consuming task plagued with outdated information. 

    Modern, cloud-based ERP platforms allow for an always up-to-date forecast the moment it’s requested. This single feature is reason enough for analysts everywhere to push for an ERP rollout within their organization.  
     
  3. Regularly review cash management systems and procedures
    Don’t be an ostrich with your head in the sand. Regularly audit cash management procedures and identify opportunities for improvement. In addition to unearthing new opportunities, frequently auditing cash management procedures gives companies the confidence in their records—without having to perform full audits. 

    What’s more, modern cloud-based software has ushered in the integration of data silos. This makes regularly reviewing cash flow reports as simple as clicking a button.
     
  4. Create a single cash management infrastructure for international organizations
    The peculiarities of cash flow management are compounded when companies participate in global economies. Organizations, then, need to be cognizant of cash management procedures within the borders where the cash is earned—as per local and international ordinances—along with methods for integrating those foreign cash management functions with the organization’s domestic counterpart. 

    If, when, and how to move those currencies back into the organization's home country is a topic beyond the scope of this article. Re-domiciling those funds, then, is left to the discretion of the CFO.
     
  5. Limit core cash management banks
    It’s also in your organization’s best interest to limit the number of banking institutions performing essential services. This is an example where you don’t want too many chefs in the kitchen. 

    Conversely, you should always be comparing competing banks’ services—and make that information transparent and openly available to all banks you may choose to work with at a future time. That way, if and when you do decide to jump ship, you’ll be able to do so with little interruption in service.

 

About the Author

Chris Doxey

Chris Doxey, CAPP, CCSA, CICA is an independent management consultant providing Internal Controls and Business Process Best Practice Solutions. She has extensive experience in procurement, accounts payable, internal auditing, internal controls, Sarbanes-Oxley compliance, payroll, logistics, financial systems strategy, and financial integration at Digital, Compaq, Hewlett Packard, MCI, APEX Analytix, and Business Strategy, Inc. She was recruited to assist MCI (formally WorldCom) recover from their internal control challenges. She has a bachelor's degree in English, a bachelor's in accounting, a master's in business administration, and a graduate certificate in project management. Chris has written numerous articles and published two handbooks: AP Leadership Skills and Implementing a Controls Self Assessment Program for Your Accounts Payable Department.

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