You've undoubtedly heard before that cash flow is the lifeblood of business and that ineffective management of cash flow is the most common cause of business failure. This is true, however positive cash flow also has other benefits.  No matter what the economic conditions, businesses are always looking for the edge over their competitors and in most cases, getting this edge requires cash. So, here are our tips for managing business cash flow.

• Top tips for managing business cash flow
• What is cash flow and why is it so important?
• Where does cash come from and where does it go?
• What is the difference between cash flow and profit and loss?
• Developing an effective cash flow management process

Top tips for managing cash flow:

   - Develop a cash flow projection and ensure you monitor and update it regularly
   - Minimise bad debts through an established credit assessment procedure
   - Establish an accounts payable policy at the outset of every credit relationship
   - Closely manage your invoice process and collections practices
   - Re-arrange annual payments such as insurance so you pay small installments frequently - this will help to smooth
     out lumps in your cash flow cycle
   - Use short term cash surpluses wisely - don't keep them in accounts that don't pay interest

What is cash flow and why is it so important?

Like it or not, cash is effectively a way for business to keep score as it tracks the flow of available funds that come into your business and flow back out again. It is vital to your success as without the inflows of funds you will be unable to pay your suppliers, employees and financers. You may have sold loads of goods and have a fistful of invoices to show for it, but you can't pay people with them - you need the cash. Also, without sufficient cash, you'll eventually go out of business.

Where does cash come from and where does it go?

For most businesses, the primary source of cash is sales but, this isn't necessarily a direct path.  Because many firms extend trade credit to their customers, the sale hangs around as an account receivable for a period of time (preferably as short as possible) before it gets paid. While that account is outstanding it cannot be classified as cash and it is impacting your business cash flow.

If you are already running your own business you will know where cash goes but for those of you looking to start a new company, cash generally goes to all the places you'd expect: to suppliers, employees, to repay debt and to further invest in the business.

It's important to remember that the balance in your bank account may not be a true picture of your cash position. If you've presented a cheque that's yet to be cashed you need to ensure that you have the funds available to honour the payment. On the flip side, if you have customer payments in hand that have not been deposited you should get them into the bank as quickly as possible to make those funds work for you.

Balancing the incomings and the outgoings can be a challenge but not doing so can mean the end of your business.

What is the difference between cash flow and profit and loss?

A company can be profitable while experiencing cash flow problems that drive it to bankruptcy. The key reason for this is that profit includes non-cash items and estimates. For example, the value of your plant and equipment will be included in your profit and loss statement but you can't use these items to pay for things - this is why cash flow is so important to business survival.

Cash flow is a less forgiving number that factors in payments and expenditures. It can be more difficult to predict than profit and loss, (particularly for SMEs that are dependant on a few large customers) as its easier to predict when you will close a sale and earn the profit than it is to determine when your customers will pay.

So because a business has more control over its cash payments than its cash receipts you need to make the arrangement work for you - that means you should pay your bills on time but never pay them early. 

Developing an effective cash flow management process

Managing cash flow can be tricky but it will alert you to trouble before it occurs, so it is important to have an appropriate process in place to effectively manage this vial resource.

In its most simple form, cash flow management means delaying outlays for as long as possible while encouraging debtors to pay promptly. A cash flow projection needs to account for both incomings and outgoings and it is important to identify both set and variable costs. In addition, customers' payment histories should be taken into account as they have a significant influence on incoming funds.

It is also valuable to develop appropriate policies to regulate the extension of credit to customers. For example, think about things such as:

• Is it essential that a credit check be conducted?
• Is there a set number of customers that you need to hit?
• How quickly do you want your customers to pay and how will you ensure they pay on time?

Bad payers are a substantial drain on business cash flow so it is important that you ensure your business is prepared to manage your accounts receivable process.