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The Importance of Managing Cash Flows

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Managing Cash Flows – Why is It Important for Your (Small) Business?

You have a great business; one that you know has the potential to earn big. You have a good business strategy, a great business location, great products or services; in fact, everything is just…well, great. You start out your business that, albeit still small, you know will eventually grow big one day.

Everything is just going along fine as you embark on the road of business and entrepreurship. And then suddenly you wake up one day to the reality: your business is floundering! You’re unable to pay your suppliers, your employees’ salaries, and your loans. You’re not even able to pay yourself!

You ask yourself what went wrong. You’re a great people person, you manage your time and your business well, you are so in to your business idea that it is just not possible that you are suddenly suffering illiquidity or insolvency or even bankruptcy. The answer? You were not able to plot and implement a good system of cash flow management. In short, you forgot to manage your cash flow well.

A good system of managing one’s cash flows or cash flow management can spell the difference between a successful business and a failed one. This is true whether the business is big or small. In any business venture, cash is always the king.

Cash is King!


Manage Your Cash Flows, Some Tips

Manage Cash Flows - How To

But My Business is Profitable, Why Should I Bother With Managing My Cash Flows?

First of, a profitable business does not mean a cash – rich business. You can be profitable but your cash flows are always in the negative. Why? Because there is what accountants would call ‘timing difference’.

Timing difference, in relation to profits and cash flows, is basically the difference between the date when you sold an item and the date when you collected the proceeds from selling that item (your cash inflows). Timing difference exists if you offer credit terms to your customers (like 30 days, 60 days or even 90 days).

In relation to expenses and cash flows, timing difference is the difference between the date when you actually purchased the item or when you availed of the services and the date when you paid for those item or services (your cash outflows). This, in turn, means credit was extended to you by your suppliers.

So what does the above mean? It means that you can see lots of sales on your profit and loss statement (the statement which tells you how profitable your business is) but you haven’t really collected all of them. It also means you can see lots of expenses on the same statement but you haven’t really paid for all of them.

So where does managing cash flows enter into the scenario (and believe me, it’s a common one)? Managing your cash flows will ensure that you will pay everything on time every time even when you don’t collect everything all the time. Bit of a tongue twister there, eh?

In short, even if your cash inflows or collections are not good, you are still able to pay off all your suppliers, employees, expenses and your debts. In other words, properly managing your cash flows will ensure that you will avoid illiquidity and, even, bankruptcy.

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Okay, I Hear Yah! Tell Me More!

Take it easy! I’m getting there.

First stop, you need to remember that proper management of cash flows does not mean that you have lots of cash on hand (or in your bank accounts) at all times. It means that even if you don’t have lots of cash today, you will get enough tomorrow to pay off everything that is due (or that you owe).

Secondly, managing your cash flows does not mean you ensure that all your cash inflows will come from your operations or sales. You can also get cash inflows from other sources like your investments and, even, your bank (through a bank loan). So make sure you have a good relationship with a bank, you’ll never know. You might run to them for a bank loan when you see you are about to face a problem paying off your suppliers.

Thirdly, learning to manage your cash flows will not happen overnight. It is not something that you can just snap your fingers at and then you will magically know how to manage your cash flows. And no, you don’t have to take a business or accounting course to know how to manage your cash flows. What you need to know is where your cash is really coming from and when will you get it and where your cash is really going to and when will you release (or disburse) it. To do these, you have to study and to observe your business and the movement of your cash. Sounds easy? Heck, no.

So How Do I Manage My Cash Flows?

Glad you asked. Here are some steps on how you can go about managing your cash flows:

1) Understand Your Cash Flows

Understanding your cash flows means you have a good grasp of your cash inflows and outflows and their movements. Where are your cash inflows coming from? When do you receive them? Where are your cash outflows going to? When will you release them? Understanding your cash flows is not an easy process as it sounds. You need to observe, and to record everything (and these things take time) so that you can have something you can study on.

2) Document All of It

Managing your cash flows is not something you can do all in your head. You need to put them all down into writing. If your business is small and you’re the only one handling everything, take heart. This portion is easier than it sounds. Just prepare an Excel file, record all your cash outflows and your cash inflows, by month and date. Group them according to their sources, then combine them. Do this every month of every year you are in business and soon, you will get solid information of your cash flows that you can use to analyze.

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3) Analyze Your Cash Flows

You have a basic understanding of your cash flows. You know where and when your cash inflows and inflows occur. Now you need to analyze this information. Are your cash inflows often enough to pay for your cash outflows? Are you giving your customers more credit terms than what your suppliers are giving to you? If yes, is this fact hurting your cash flows?

4) Prepare a Working Cash Flow Budget

After you have documented and analyzed everything, you need to prepare your very own cash flow budget. This is basically a projection of all your cash inflows and outflows for the coming months or even coming years. You don’t need to be a fortune teller to do this one; you just need to have a realistic grasp of your current cash flow movement and an intelligent projection of your future cash flows.

5) Improve Your Cash Flows

If you have more cash inflows than outflows. Congratulations. That’s a sign that you’re managing your cash flows well. But if it’s the other way around, try harder! Either way, you still need to analyze your cash flows to see if there’s anything you can improve on it. Are you lagging behind in your collections? Are some of your customers not paying you on time? Accelerating your collections can help in improving your cash inflows. Are you paying your suppliers on time? Are you taking advantage of your suppliers’ discounts or do you get slapped with interest because your payment was delayed? Are you always hiding from the people your business owe money from (hope not!)? Improving your cash flows may be as easy as fast tracking your collections and may be as complex (and painful) as cutting down on your expenses, letting go of some people and even cutting down on your operations.

6) Handle Any Remaining Cash Well

Okay, you’ve done everything. You’ve managed to improve your cash flows and you are now managing your cash flows well. In fact, you always find yourself with excess cash. What’s left? Proper cash flow management means you also properly handle your excess cash well. Don’t leave it inside your cash vault. Invest it and earn more from it.

Hope you find this hub helpful. Good luck!


Cash Flows

Managing Cash Flows


luke pearson on February 20, 2014:

I came across Barbar Financial in Broward County while searching for help with the accounting for my business. I made an appointment where I met with Mr Barbar over coffee and discussed what my issues were. With his guidance, I was able to not only better manage cashflow but understand my finances as well. Check him out at Barbar Financial's website

lhynn on February 17, 2013:

yeah it is important to know the cash flows of our business...

Judy Caroll on February 23, 2012:

Any business can survive the test of time when there's an effective cash flow management in place. Thanks;)

RetailRich on February 12, 2012:

Aside from the critical importance of cash flows, business owners need to be sure they are getting their P & L statements on a timely business. Too often, the information comes back from the accountant or book keeper 2 months or more down the road. By then, this is old history in terms of knowing where your business stands.

BizVT34 from USA on February 12, 2012:

Excellent advice. We see way too many businesses that have been growth constrained and end up in trouble because they don't understand the cash required to operate the business, especially growing businesses.

sam on September 21, 2011:

well, it has helped me manage the little I have and given me money discipline.

Kamarulzaman on July 18, 2011:

I am Kamarulzaman Baharom and the Author of book named “Now Everyone Can Prepare Daily Cash Flow Report” which has been published in and Apple iBookstore. You can get free view the sample chapter of the book by following the link here

icehubber from Iceland on April 15, 2011:

One of the better hubs

TopUniverse on December 29, 2010:

Managing cash flows is very important for every business especially small businesses. I love the steps you provided to manage the cash flows.

nick21521 on December 16, 2010:

nice to go

free contracts on October 13, 2010:

thank you for the useful insight

alishaneuron from Colorado (U.S) on October 07, 2010:

Really enjoyed hope for the next one...

map65 on August 29, 2010:

this is very important - thanks!

emievil (author) from Philippines on August 16, 2010:

@WebTechEngineer, that's actually my biggest frustration with some of my clients. They don't look at their cash flows. Some even mix up their business and personal cash flows. It gets really annoying sometimes. Anyway, thanks for the comment. And welcome to HubPages :).

@theor23, you're welcome. Glad to see my hub inspiring you. :)

theor23 on August 16, 2010:

I just want to say, wow. You have inspired me in many ways. I have just started upon my internet marketing journey. Thank you!

Theodore Rhoades

WebTechEngineer from Houston, TX USA on August 15, 2010:

A big mistake I've seen in quite a few small businesses is that they only focus on their balance sheets and income statement each month. Many don't even realize there is a cash flow statement as well. Some may have a current list of what money is coming in versus what is going out but that's not the whole picture. A report showing what money CAME in and how it was used will reveal a lot of flaws in cash management, especially if there is a budget to compare actuals against.

Great Hub !! Thanks for Sharing !!

neeleshkulkarni from new delhi on July 17, 2010:

of course you are right.only cash matters.been running a small business for years and the only thing that has kept us alive has been a complete control on the case flow. "where is the money" is my constant refrain and believ eme it works.

masaa from Kenya on July 15, 2010:

This will assist me with my finances


The importance of cash management is very important in every area of business. For smooth running of business constant inflow of cash is very important. This results in the robust growth and huge profit. Videos are very informative and good. Thanks for sharing such a wonderful peace of text.

jasper420 on June 24, 2010:

great info i have alot of trouble with money your hub helped me to see how important it is to better spend your money

Brian Bober on June 23, 2010:

Thank you for the information Brian Bober

jeanie.stecher from Seattle on June 23, 2010:

Hi there! This is a nice hub. It indicates one of the most important things we must have in life, learning how to save. One way indeed of doing so is to manage your cash flow. In doing so, you will have great and practical savings and a prosperous business. Well, this is quite effective not only for personal purposes, but also in managing your own business or in a certain employment workplace. Nice hub.

emievil (author) from Philippines on June 22, 2010:

@oskaaay, thank you for those nice words.

@edquider, need an accountant? :) glad you find my hub useful. Good luck with keeping books on your book shop. You can do it. If you have any questions, feel free to send me a message.

edguider on June 22, 2010:

Wow, I really got to read this one again. I need to manage my cash flow, I do not even keep books on what our book shop makes :(

oskaaay on June 21, 2010:

Thank you for an interesting and helpful hub, we need more of it.

emievil (author) from Philippines on June 21, 2010:

Thanks lender. I guess that's why I wrote this hub, I can see some of my clients who do not know how to handle their cash flows and treat their company as if it is a bank (like they can withdraw cash anytime).

lender3212000 from Beverly Hills, CA on June 21, 2010:

Those are some excellent tips! I'm amazed at how many businesses can't seem to manage their cash flow properly and end up short on available cash for essential operations. Great lesson to be learned by anyone running a business or considering doing so in the future!

Shrikrishna Meena on June 20, 2010:

Thanks man, it is really a useful article.... Gained some New knowledge...

celebrity on June 20, 2010:

thank man you make my day

emievil (author) from Philippines on June 19, 2010:

LeanMan, me too. A lot of businessmen actually look at their cash flows more than they look at their income statement. Even if they have a loss, they're still happy if the cash flows are positive.

Tony from At the Gemba on June 19, 2010:

Very good hub, "Cash is King" is so very true, I have seen many viable businesses fail over the years for failing to handle their cash flows..

emievil (author) from Philippines on March 10, 2010:

Thanks Dale. You always make my day when you say your posting my hub in your blog :).

Dale Mazurek from Canada on March 10, 2010:

What a great hub.

So many people could take a lesson from this.

Anyways the hub is now posted on my blog



emievil (author) from Philippines on March 01, 2010:

Thanks loweh1. Welcome to hubpages!

@abi-hisham, bunker or shelter huh? That bad???? LOL Thanks for visiting my cash flows hub :).

abi-hisham from jeddah, saudi arabia on February 15, 2010:

very good info, thanks a lot for that. I am incharge of accounts payable deparment and so far I haven't come across a difficult situation where I am looking for a bunker or shelter to evade from people who I owe money to.

loweh1 from Bournemouth, UK on February 09, 2010:

Nice information, and with a clear message we can all agree on. If it helps I have a small cash flow and bank reconciliation product which could make this even easier.

prasetio30 from malang-indonesia on February 08, 2010:

really nice information. I'll try to follow your advice. We have to manage the cash flows very well in our life. Money is important, but how to maintain it well is the hardest things. And we have to learn about that. Like reading this hub. Good work my friend!

emievil (author) from Philippines on February 08, 2010:

Hey Dohn. I'll be happy to but I don't know how. :) You're welcome.

dohn121 from Hudson Valley, New York on February 07, 2010:

What a great HubMob Hub, Emie. I'm not sure if I'll have time to do this week's HubMob topic, but I'll certainly try. You know, on top of reading my nearly 100 hubs, commenting on all of them, making forecast as to when I'll reach my next milestone, maybe you can help me get me to become better with money! This hub has helped me to understand how to better manage my $$$ and my cashflows. Thanks!

emievil (author) from Philippines on February 07, 2010:

@Papa Sez, you're welcome.

@MG, thanks so much. I hope I can write more hubs like this. I often see businesses that are supposed to be doing good but the owners cannot afford to pay their suppliers. Hope I don't encounter this problem one day. Thanks for your comment!

Money Glitch from Texas on February 06, 2010:

Excellent emievil! I wanted to do a hub on cash flow, however, I could not find a way to keep it from being boring. You on the other hand have done an awesome job of keeping it both interesting and in terms that is easy for anyone to comprehend.

Again great job, because everyone needs to have a good understanding of why cash flow is so important in business. :)

Papa Sez from The Philippines to Canada on February 05, 2010:

Yeah emie, cash is indeed king. That's why a lot of small restaurants (eatery, food cart business, etc.) in the Philippines survive as cash flow is good (no matter how small, as long as customers buy on cash basis). Thanks so much for these cash management ideas.

emievil (author) from Philippines on February 04, 2010:

@chinweike, you're welcome. Will come out with other hubs such as this in the future. :)

@Hello, you're welcome.

Hello, hello, from London, UK on February 04, 2010:

Thank you for an interesting and helpful hub.

Chinweike from Glasgow, UK on February 04, 2010:

The problem of wanting to master the art of cash flow management overnight is one mentality that people must get rid of. Great hub, more of these type.

Thanks for sharing

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