Cash flow management looks into four aspects:
Income, Expenses, Savings, and Investments.
Net Profit is a key indicator of the growth aspect of an entity, however what is even more critical to a business than the net profit is the cash flow generated by the business. Cash Flow is analysed into 3 core areas – Cash Flow from Investing, Operations and Financing.
Impact of Cash flow on Business Entity
While analyzing the financial statements of an entity, higher amount of stock, debtors and loans and advances does not necessarily indicate a favorable position if it is accompanied by huge loans on the liability side. Unmoved Debtors over the years indicate cash flow blockage as well as lower probability of recovery. Higher Creditors and Loans indicate huge possible outflow in the nearby future.
Payment of taxes based on the net profit of the entity results in outflow of funds from the business. The same needs to be taken into consideration at the start of the year to manage overall flow of funds during the year.
"Never take your eyes of the cash flow because it's the lifeblood of the business"
- Sir Richard Branson
Investing
Investing of Funds or reinvesting into the business would in turn generate cash inflow in the form of dividends or Business growth if done with a proper study of the market conditions. Investing is merely change of form of the Funds and not an outflow.
Budgeting
Budgeting of cash inflow and outflow done at the start of the year helps achieve short term as well as long term future goals like education, household debts, medical expenses, retirement, etc.