The ultimate guide to cash flow management for finance teams

Cash flow management is the process of tracking the money your business receives and measuring it against what you spend to get an accurate look at how much cash you have. When cash flow management is done properly, it ensures your business has the liquidity to meet immediate and long-term obligations, invest in opportunities, and maintain the overall financial health of your business.

The three main components of a cash flow statement

1. Operating activities

These are the day-to-day transactions related to your core business operations. Think, revenues from sales, and payments for goods and services.

2. Investing activities

This includes the purchase and sale of long-term assets — like property for your office and equipment for production, as well as investments in securities.

3. Financing activities

This includes the transactions related to raising capital through debt or equity and repaying loans, including issuing stocks or bonds and paying dividends​.

Effectively managing your cash flow is crucial for maintaining the health of your business. It means that you can actually afford to continue growing, and proactively manage against the risk of not having enough cash to pay vendors or buy supplies.

A cash flow statement helps establish a baseline of how much cash you have by subtracting the total amount you’re making, minus what you owe. By creating one, you can track the movement of cash into and out of your business over a specified period — typically monthly, quarterly, or annually.

A cash flow statement categorizes all inflows — like revenue from operations, financing activities like loans or investments; and all outflows — like operating expenses, debt payments, and investments in assets or acquisitions. By listing out these components, the cash flow statement offers valuable insights into your overall operational performance, financial health, and potential for future growth.

There are a ton of resources available online that help you generate a cash flow statement, but as a general guide using the direct method, you would:

1. Determine your starting balance

Record how much cash you have at the start of your reporting period (e.g. the first of the month). For example, if you had $50,000 in your business accounts on May 1st, that's your opening balance for May.

2. Calculate cash from operating activities

List your cash receipts and cash payments, and calculate the net total from all operating activities. Include things like:

• Cash from sales: $100,000
• Cash paid to suppliers: -$40,000
• Salaries and wages: -$30,000
• Rent and utilities: -$5,000

Net it all out. In this example, your net operating cash flow would be $25,000.

3. Calculate cash from investing activities

Identify cash transactions like the purchase of fixed assets and cash received from selling assets. And then calculate the net cash flow by subtracting cash payments for investments from cash receipts from sales of investments. For instance:

• Purchased new computers: -$10,000
• Sold old delivery van: $5,000

Your net investing cash flow here would be -$5,000.

4. Calculate cash from financing activities

List all the cash you received from things like issuing stock or debt and cash spent on repaying debt or buying back from. Then calculate the net cash flow by subtracting the payments from the receipts. For example:

• New bank loan: $20,000
• Loan repayment: -$2,000

This gives you a net financing cash flow of $18,000.

5. Combine these flows

Add up the net cash flows from your operating, investing, and financing activities for your overall change in cash for the period. Now, add up your net flows:

• Operating: $25,000
• Investing: -$5,000
• Financing: $18,000

Your total net cash flow in this example would be $38,000.

6. Reconcile with starting balance

Add the change in cash to the beginning cash balance for your ending cash balance. And then check it to make sure it matches the cash balance on your balance sheet. Add your total net cash flow to your opening balance:

• Opening balance: $50,000
• Net cash flow: $38,000
• Ending balance: $88,000

This $88,000 should match the cash balance on your end-of-month balance sheet.

Again, this is a very basic overview, but gives you a general idea of how to calculate your cash flow to see how much money you’re making and spending.

The above is a basic guide on how you can categorize and calculate your business’ cash flow. Below we'll break down 5 proven ways you can get a better grasp on your cash flow as a whole, improve cash flow, and continue to optimize it as you grow.

1. Forecasting cash flows

The first technique for helping to manage cash flow is forecasting. This allows your business to anticipate future financial needs and flag any potential shortfalls. To forecast you can look at:

• Historical data analysis: This involves looking at your past cash flow data to find patterns, trends, and seasonal fluctuations. By analyzing historical statements, you can make informed predictions about how your future cash in and out may net out.
• Trend analysis: This involves looking at the overall market for patterns and trends. This method considers factors like sales growth, market trends, and economic indicators. It helps you anticipate shifts in revenue and expenses.
• Cash flow modeling software: You can also automate your analysis using software that runs scenario analysis, sensitivity analysis, and customizable reporting. This allows you to generate accurate and detailed cash flow forecasts based on the market.

Long story short — accurate cash flow forecasting allows you to anticipate trends and plan for them. Which means you can plan to ensure you always have the funds you need to meet operational expenses, investment requirements, and debt obligations.

2. Cash flow audits

Regularly monitoring your cash flow, and running reports that track your cash flows both in and out, helps identify discrepancies between your forecasts and actuals. Closely tracking your cash on a weekly, monthly, or quarterly basis allows you to find any deviations from expected trends and take action to correct the problems before they snowball.

Utilizing cash flow management software and accounting automation can provide real-time tracking, so you have always up-to-date information to report on. This helps you make proactive decisions, timely adjustments to forecasts, and better manage your liquidity — all which can improve your overall financial performance and reduce any risks of cash flow shortages.

3. Automate bill payments

Another technique to simplify cash management is automated bill payments. This streamlines the process of settling any outstanding bills, so that you’re paid on time, every time. Accounts payable automation software for example, reduces the processing time of payments and minimizes the potential for manual entry errors that might give you inconsistent data.

You also save a ton of time drafting bills, or manually enter invoice line items for vendor payments — allowing your team to focus on more valuable work. Plus, by automating your outgoing bill payments, you reduce the risk of late fees, penalties, and disruptions from unpaid invoices.

4. Optimize payment schedules

A fourth technique you can use to manage your cash flow is optimizing your payment schedules. This means strategically timing vendor payments to maximize cash flow flexibility. There are various ways to do this, like negotiating extended payment terms with suppliers. This allows you to preserve cash for other operational needs or investment opportunities.

Also, taking advantage of early payment discounts offered by suppliers means more cost savings. By optimizing your payment schedules, your business can add an extra layer of flexibility with every dollar in and out.

5. Strengthen collection processes

Finally, strengthening your collection processes means you paid on time more often. Automating your invoicing, for example, helps streamline payments and can automate follow ups for overdue payments. And once the payment is received, it can be instantly tracked for a more accurate view of your cash on hand, versus manually recording it in a spreadsheet.

By promptly addressing outstanding invoices and maintaining clear communication with customers, you not only accelerate your cash inflows, but you reduce the risk of bad debt, and improve overall financial stability.

So far we’ve taken a look at what cash flow is, and strategies on how to improve your management of it, but it’s also important to look at possible challenges you might face.

Here are a few common challenges to be aware of:

Late payments and overdue invoices

As mentioned above, you are often reliant on others to settle their invoices within an agreed-upon timeframe. Late payments occur when they fail to make those times, leading to cash flow disruptions and liquidity issues for your business. Overdue invoices can also strain relationships with customers and suppliers, and hurt your forecasting.

Unforeseen expenses and economic downturns

The truth is — you can’t always predict the market. Unforeseen circumstances can arise that unexpectedly raise costs beyond your forecasted amounts. This includes things like equipment breakdowns or legal fees, which place additional stress on your cash reserves. Economic downturns and reduced consumer spending can also negatively impact your revenue.

Poor budgeting and forecasting

As we covered above, not forecasting potential issues and properly budgeting for those dips can impact your cash flow. It means you might spend too much cash before a seasonal sales dip for example. Or even worse, you can underestimate expenses or overestimate revenue, which leads to overspending.

Bad collection processes

This just comes down to not getting paid when you’re supposed to. By having the right tools and processes in place you’ll get paid on time. Not having the right processes in place means delayed payments and lack of cash flow.

Lack of payment terms

Not setting our clear payment terms with customers can make collecting payment more of a headache than it needs to be. It can lead to confusion and disputes over payment amounts and timelines, which messes with your bottom line.

All of these are easy to navigate, but important to keep in mind. With the proper processes and tools in place, you can avoid a lot of these issues by automating invoices and tracking all of your cash flow in real time.

There are a lot of moving pieces when it comes to managing your cash flow. But what if there was an easier way to manage it all? That’s where accounts payable automation software can help — by streamlining bill payments and improving your processes.

Traditional AP processes are often manual and time-consuming, leading to accounting errors and inefficiencies. Automating your AP process with Brex can offer several benefits:

• Increased efficiency: Eliminate unexpected invoices and charges by pre-approving procurement budgets with embedded policies, and customized approval flows. Brex will automatically enforce it all across purchase card transactions and invoice payments.
• Faster payments: Set up one-time or recurring domestic and international payments in 40+ currencies via ACH, wire, or card.
• Improved accuracy: Capture invoices, draft payments, and generate receipts and memos all without human data entry for more accuracy and expense compliance across all spend.
• Close the books faster: Brex automatically syncs every transaction with your ERP fields and GL codes — and you can view all your spend in real time.
• Enhanced controls: Set approval workflows and spending limits to ensure greater control over your finances.

You’re now an expert on what cash flow is, how to manage it, and how platforms like Brex can help automate every step — now let’s look at a real example of how it all comes together.

Picture a small creative agency that is struggling with late payments from clients. They decide to implement Brex, and its invoice automation solution to streamline their whole accounts payable process. By using Brex, the agency can reduce their manual work when drafting and sending invoices. Plus, they can automate payment reminders and follow-ups for overdue payments.

And, with a proper, automated schedule put in place, not only is the client receiving notice for payment more often, but they can actually set up and save their payment info for future invoices. This means less late payments, better client relationships, and improved cash flow for the agency. It also means more financial stability, and the ability for everyone to focus more on growth initiatives, like winning new business, rather than chasing existing customers for outstanding payments. Smart, right?

Cash flow can be a complex concept, but one simple takeaway: it’s extremely important to get right. Again, 82% of businesses fail due to mismanaging their cash flow — which emphasizes just how vital it is to running a successful business. By accurately forecasting your cash flows, optimizing payment schedules, and strengthening your collection processes, you can enhance overall liquidity and mitigate risks of being cash poor.

And with the right accounts payable software, like Brex, you can automate a lot of the processes that will save you time and give you a more accurate view of where you stand.

Book a demo with a rep today and get a full rundown of how you can start better managing your cash, paying bills, and staying on top of every dollar on Brex!