Profitable Cash Flow Management

One of the most important daily problems faced by any business, large or small, is to ensure the continuous, effective and healthy management of cash. The most important reason for this problem is that a "Cash Flow Management" consciousness has not yet been developed in our enterprises. Due to this, it is often seen that daily cash flow problems take up a great deal of time for managers and are generally not as effective as desired in the results obtained. With the help of an effective cash management system, managers will be able to take more strategic decisions regarding their cash needs and/or surpluses by avoiding dealing with narrow-scoped activities to meet daily needs.

Cash management is not a policy to be created with daily developments. Yes, an effective cash flow management system should be flexible enough to adapt to daily changes. However, this does not mean that these policies are determined on a daily basis. Cash management is an indispensable condition for a business to continue its activities in a healthy way. Only in this way will it be possible to maintain the current strategic position and continue the development.

Before we talk about cash flow management strategies, let's try to briefly explain the basic concepts. Cash; It refers to the money in the bank and/or in our safe and which do not have any hindrance in their use. At this point, I think it would be useful to draw attention to the distinction between "Profit" and "Cash". Profit and cash are different concepts. Profit refers to the monetary amount planned to be obtained as a result of making the collections you expect all customers to make on time and realising their expenses to the expected extent. However, the concept of profit is far from the daily reality of businesses. Cash is a must-have concept to keep our business open while we strive to make a profit. In other words, cash refers to the minimum monetary quantities that must be available in order to continue the business and thus to make a profit. In this sense, if the profits of the companies cannot turn into positive net cash flow, they do not have much value.

Profits cannot be spent, only cash can be spent. In practice, although it is profitable most of the time, it is encountered with businesses that face cash crunch.

A seemingly successful business may fail due to low cash flow. Also, even if low cash flow doesn't put your business at risk, it can hurt your growth potential.

For example, let's say you run a small business that manufactures cosmetics. A large retail chain wants to order 25,000 nail enamel. You will earn a lot of money, but the retail chain will not pay for 90 days after you deliver the products.

You have to buy the raw materials and packaging parts for the products, pay your employees to assemble your products, and pay to ship the items to the retailer. This whole process can take up to 30 days.

It can be a great opportunity to earn money and promote your brand to new customers. However, you realise that you cannot pay for packaging, employees, shipping and all your usual business expenses while you wait for payment to be made. Unfortunately you have to turn down this great opportunity because you are not making enough money to cover all the expenses.

Or, given the same situation, a different business owner may accept the offer without considering the whole process. After paying for parts, assembly and shipping, the order reaches the retail chain and the 90-day countdown begins. However, at this point, there is no money left in the business.

He can't pay employees to stay on the job, can't afford their rent, and the landlord threatens to kick the business owner out of the building. Although a lot of money is owed to the business, it does not have enough savings to cover the costs of daily activities. He has to close the business without receiving the payment.

It’s important for business owners and managers to understand how to manage and how to analyse their cash flow. Otherwise,no matter how talented you are to get a new customer or order, your business will have difficulties to survive.