Manage your business cash flow how to bring optimum efficiency?

According to statistics, more than 80% of businesses fail not because of lack of profit, which for no good control cash flow. Cash flow management is not merely recording income and expenditure, but also the art of maintaining the survival and sustainable development of the enterprise.

So, how to control manage your business cash flow effective? Common mistakes that businesses meet financial risk? And most important, the business can technology application, how to manage cash flow smart?

This article Lac Viet Computing will help you learn in depth about management, cash flow, from the optimal method to app AI in financial monitoring to help businesses maintain liquidity sustainable growth.

1. Manage your business cash flow what is?

1.1 what is money? Distinguish cash flow and accounting profit

Cash flow (Cash Flow) is the flow of money into/out of business in a given time period. Cash flow includes all the revenues and expenses of the business, from business activity and investment to finance.

Many businesses often confuse between cash flow and accounting profit. Accounting profit (Accounting Profit) reflects the net income after deduction of expenses, but did not reveal the exact amount of money the business actually have in hand. In contrast, cash flow indicates the amount of actual money that the business can use right now.

For example: A company has revenues of 5 billion, but the customers delayed payment in 60 days. Meanwhile, the company has to pay employees, buy materials now. If not, cash flow management, good business can be difficult in terms of liquidity, although still have high profits on the financial statements.

1.2 cash flow Management what is a business?

Manage your business cash flow is the process of monitoring, analyzing, optimizing cash flow out into the business to ensure solvency, maintain business operations, decision support, financial.

A system for managing cash flow effectively help business:

• Cash flow forecast in the short term – the long term to avoid the shortage of cash.
• Control revenues and expenditures, optimize operating costs.
• Limited financial risk, particularly during periods of economic downturn or market fluctuations.
• Given the investment decision, financing based on cash flow reality.

2. The type of cash flow of the business

Cash flow business is divided into three main categories according to the report of cash flows:

2.1 cash Flow from operating activities (Operating Cash Flow – OCF)

This is the cash flow arising from operations of the business such as sales, provide services, pay salaries, purchase of raw materials. Cash flow from operating activities reflect the financial health of the business, as it suggests the business can generate cash from core operations or not.

The main factors that affect cash flows from operating activities:

• Revenue from sales
• Duration debt collection from customers
• Operating costs (wages, rent, cost of raw materials)
• Accounts payable for suppliers

For example, If a production company has revenues of 100 billion, but customers pay only 50% in advance and the rest after 90 days, the business may face pressure short-term cash.

2.2 cash Flow from investing activities (Investing Cash Flow – ICF)

This is the cash flow related to the acquisition, investment in long-term assets or investments financial. Cash flow from investing activities help assess the degree of expansion or narrowing of the scale of business.

The main activities related to cash flow investment includes:

• Purchase machinery, equipment, fixed assets
• Investment in subsidiaries, joint ventures, stocks or bonds
• Liquidation of assets or sale of investments

For example, A technology company spending 10 billion to upgrade the system server will record the cash outflow from investing activities. On the contrary, if the company sells a machine for $ 20 billion, this will be cash inflows from investing activities.

2.3 cash Flows from financing activities (Financing Cash Flow – FCF)

This is the cash flow activities related to raising capital, to repay debt, including issuance of shares, bank loans, loan repayment or pay dividends to shareholders.

The main factors that affect cash flows from financing activities:

• Raising capital from shareholders or investors
• Borrowing and repayment of bank loans
• Dividend to shareholders

For example: A business bank loan $ 50 billion to extend the production will be recorded in cash inflows from financing activities. If the business pays interest on the loan 5 billion per year, which will be the cash outflow from financing activities.

3. The only important numbers in business cash flow

3.1. Flow net cash (Net Cash Flow)

Flow net cash (Net Cash Flow) is the actual amount remaining after the business minus all the expenses from the total cash flow in a given time period. This is an important indicator to help assess whether the business is generating positive cash flow or not.

Formula for calculating cash flow net

Flow net cash = Total cash flow – to- Total cash outflow

In which:

• The total flow of money into: includes revenues from sales revenues from investments, loans or issuing stock.
• Total cash outflow: include payments to suppliers, employee wages, loan repayment, operating expenses, investment in fixed assets.

Analyzing fluctuations in cash flow, net

• Cash flow positive net: Businesses are generating more money than the amount of money spent to help maintain operations, expand investment.
• Cash flow net voice: If prolonged in many states, businesses can face the risk of insolvency. However, negative cash flow in the short term can occur when business invest heavily in fixed assets or business expansion.

For example: A business has total cash flows to be $ 50 billion and total cash outflow is 40 billion, then the money flow net is +10 billion, suggests the business is generating good cash. Conversely, if the net cash is -5 billion, the business should look to cut costs or find additional funding.

3.2. Money flow index on profitability (Operating Cash Flow to Net Income Ratio – OCF/NI)

Money flow index on profit (OCF/NI) reflects the rate of cash flow from operations compared with net profit of the business.

Formula:

OCF/NI = cash Flow from operating activities / net profit

In which:

• Cash flows from operating activities: Taken from the cash flow statement.
• Net profit (Net Income): the remaining balance after deducting all expenses from revenue.

Meaning and how to evaluate

• OCF/NI > 1: Business generating more cash than accounting profit and shows profits are high quality, less affected by the account not to cash (for example, depreciation).
• OCF/NI

For example, If a company has a net profit of 5 billion, but the cash flow from business operations is only 3 billion, then OCF/NI = 0.6. This suggests the company might be experiencing problems, debt collection or excessive spending.

3.3. Index liquidity from cash flow (Operating Cash Flow Ratio – OCF Ratio)

Index liquidity from cash flow (OCF Ratio) measurement capabilities, the business can pay its short term debts by the cash flows from business activities.

Formula:

OCF Ratio = cash Flow from operations / current Liabilities

In which:

• Cash flows from operating activities: Reflect the actual amount that the business generates from its core activity.
• Short-term debt: include accounts payable, short-term loans, the other financial obligations coming due within a year.

Meaning and how to evaluate

• OCF Ratio > 1: Business has enough cash flow to pay short-term debt, demonstrate the ability to liquidity.
• OCF Ratio

For example: A business has cash flow from business operations is 20 billion, short-term debt is 15 billion, then OCF Ratio = 1.33, that the business can pay debts due date. If OCF Ratio = 0.8, businesses can have trouble to debt repayment.

3.4. Coverage ratio cash flow (Cash Coverage Ratio)

Coverage ratio cash flow, measuring the ability of businesses in the payment of interest on loans by the cash flows from business activities.

Formula:

Cash Coverage Ratio = (cash Flow from operating activities + Interest) / Interest

In which:

• Cash flow from business operations: the actual amount Of business generated from business activities.
• Interest: Total interest that a business must pay in the accounting period.

Meaning and how to evaluate

• Cash Coverage Ratio > 1.5: the Business ability to pay interest on the loan better, less financial risk.
• Cash Coverage Ratio

For example: A business has cash flow from business operations is 30 billion and to pay interest on a loan of 10 billion. If the Cash Coverage Ratio = 3.0, the business can pay interest on the loan three times without problems. If this ratio is below 1, enterprises need to consider debt restructuring or improve cash flow.

Comparison of indicators important practical application

4. Why businesses need to manage cash flow effectively?

4.1 Avoid liquidity risks and the risk of bankruptcy, despite high profits

A business can be profitable on the financial statements, but is still facing the risk of bankruptcy if not enough cash to pay the financial obligation. Cash flow management to help businesses maintain solvency, reducing the risk of losing your financial balance.

Statistics from the financial research shows more than 80% of businesses fail is due to cash flow problems, not due to lack of profit. Ensuring positive cash flow is vital to maintain operations, expand business.

4.2 optimized use of capital to grow the business

Cash flow management is not only to control spending, but also is to optimize the use of capital. Business has positive cash flow stability can:

• Investment to expand production and product development
• Enhance competitiveness by improving customer service
• Capitalize on market opportunities that do not depend on external debt

For example: A business has good cash flow can take advantage of early payment discount from suppliers, to help reduce the cost of raw materials.

4.3 Help business financial forecast more precisely

Cash flow forecast helps business financial planning long term, determine when to raise capital or when to re-invest profits. The business has forecast system good cash flow can usually withstand more in the period of economic fluctuations.

According to a survey by PwC, business strategy manage cash flow better able to maintain high profit more than 20% compared with the business does not tightly control cash flow.

5. Methods to manage business cash flow effectively

5.1. Planning cash flow details

Planning cash flow is important step to help businesses active in the financial management, ensure does not happen shortage of cash suddenly. Planning cash flow effectively is often done in stages, short-term (weekly, monthly, quarterly) and long term (6 months to 1 year).

Business can build cash-flow plan by week, month, quarter, according to the following steps:

• Bước 1: Dự báo dòng tiền vào: Xác định tất cả nguồn thu dự kiến, bao gồm doanh thu từ bán hàng, thanh toán từ khách hàng, khoản đầu tư nhận được. Cần dựa vào dữ liệu lịch sử để có dự báo chính xác hơn.
• Bước 2: Dự báo dòng tiền ra: Liệt kê tất cả các khoản chi phí cố định như lương nhân viên, tiền thuê mặt bằng, chi phí điện nước, trả lãi vay. Ngoài ra, cần xem xét khoản chi phí phát sinh không định kỳ như đầu tư mua sắm tài sản, chi phí tiếp thị.
• Bước 3: Tính toán dòng tiền thuần: Dòng tiền thuần = Tổng dòng tiền vào – Tổng dòng tiền ra. Nếu dòng tiền thuần âm trong nhiều kỳ liên tiếp, doanh nghiệp cần có kế hoạch huy động vốn hoặc tối ưu dòng tiền.
• Bước 4: Lập kế hoạch dự phòng dòng tiền: Thiết lập quỹ dự phòng để đảm bảo doanh nghiệp có khả năng thanh toán trong trường hợp xảy ra rủi ro tài chính hoặc suy giảm doanh thu đột ngột.

Real-life example of a plan cash flow

A manufacturing business plan monthly cash flow:

• Sales revenue average: 10 billion
• Revenues from customers (80% of the right, a 20% fall after 30 days)
• Operating costs: 6 billion/year
• Cost of investment to expand production: 2 billion on march 3
• Reserve fund: maintain 3 billion to ensure liquidity

With this plan, the business can determine is the month there is the risk of shortages cash flow and plan to compensate in a timely manner.

5.2. Manage cash flow by optimizing the cash cycle

Formula for calculating the Cash Conversion Cycle (Cycle conversion cash – CCC)

Conversion cycle-cash measurement of the average number of days that businesses need to convert inventory, accounts receivable into cash.

Formula:

CCC = Number of days inventory (DIO) + Number of days to collect money the customer (DSO) – Number of days to pay suppliers (DPO)

• DIO (Days Inventory Outstanding): the average Time to sell off inventory
• DSO (Days Sales Outstanding): the average Time to collect debt from customers
• DPO (Days Payable Outstanding): the average Time business payments to suppliers

Reducing the time to collect money, increase inventory turnover

Reduce recovery time liabilities (DSO)

• Put out policy early payment discount for customers
• Enhanced track and remind the public debt in order to avoid late payment
• Applied technology automatic payments to shorten the processing time bill

Increase inventory turnover (DIO)

• Use inventory management system to automatically control inventory accuracy
• Optimal production process, enter order to reduce excess inventory
• Applicable sales strategy flexibility to accelerate product consumption

Extend the time of payment provider (DPO)

• Negotiate with vendors to extend payment time without affecting relations of cooperation
• Building good relationships with suppliers to be able to negotiate beneficial terms

For example, illustrates the improved CCC of the actual business

A retail business has CCC original is 60 days, with DIO = 30 days DSO = 25 days, DPO = 5 days. After optimal cash flow management:

• Reduced DSO down to 15 days by applying electronic payment
• Prolonged DPO 20 days thanks to negotiations with suppliers
• Results: CCC reduced from 60 days to 25 days, help the business has positive cash flow more quickly, reducing pressure on liquidity.

5.3. App Finance AI Agent of Communication in management, cash flow analysis business

In the context of AI technology is changing the way business financial management, Finance AI Agent of the Encyclopedia brings a groundbreaking solution to help businesses automate cash flow analysis, to optimize the financial decisions, more accurate forecast.

This is a system assistant financial intelligence have the ability to cash flow analysis, real-time trend detection anomalies, propose optimal solutions to business always guaranteed source of funds operational stability.

Finance AI Agent to help businesses manage cash flow and how?

Giám sát dòng tiền theo thời gian thực: One of the major difficulties of the business is not have a panoramic view of the cash flow on – going real-time. Finance AI Agent to help:

• Monitor the flow proceeds – cost auto: the System collects data from accounting software like AccNet or the ERP system, from which aggregate cash flow without the need to enter data manually.
• Display visual reports: Provide chart cash flow easy to understand, help businesses quickly identify the cash balance account for income and expenditure, the largest in each of the states.
• Warning negative cash flows: If the business has cash flow net continuous, the system will send early warning to managers make timely adjustments in financial strategy.

Phân tích dòng tiền, dự báo xu hướng: Not only help to track current cash flow, Finance AI Agent also has the ability to analyze, forecast future cash flows by:

• The AI system will compare data cash flow of the business in many states before, identify the factors that influence given trends cash flow in the period to come.
• Dự báo dòng tiền theo nhiều kịch bản: AI có thể đưa ra nhiều mô hình dự báo dựa trên các giả định khác nhau, chẳng hạn như: Nếu doanh số tăng 10% thì dòng tiền sẽ thay đổi như thế nào? Nếu khách hàng thanh toán chậm 30 ngày thì doanh nghiệp có nguy cơ thiếu hụt tiền mặt không?
• Support financial decisions based on data: Based on cash flow projections business can plan spending, borrowing or investing more reasonable.

Hỗ trợ tối ưu hóa công nợ phải thu và phải trả: One of the reasons why cash flow businesses affected is the management of public debt has not yet effective. Finance AI Agent support:

• Track the real-time debt: the AI System automatically updates the list of customers in arrears, time to maturity, to help businesses control over the receivables.
• Forecast risk of late payment: AI can detect which customers tend to delayed payments based on transaction history, from that proposed measures to remind or adjust the terms of payment.
• Optimize accounts payable: the proposed System the time of payment optimal for businesses to avail the discount policy from suppliers, while ensuring cash flow is always positive.

Hỗ trợ ra quyết định tài chính linh hoạt thông minh: Finance AI Agent to not only track cash flow which also acts as a financial advisor intelligence, help businesses optimize financial decisions important:

• The proposed plan to cut costs: If the cash flow business is in trouble, the AI system will analyze the costs, hints, cut the unnecessary costs that do not affect the business operation.
• Strategic consulting, capital mobilization: If your business needs additional cash flow, WHO will propose alternatives such as bank loans, issuing bonds, seeking external investment, and calculate the impact of each alternative.
• Building plans long term cash flow: Finance AI Agent that helps the enterprise plan cash flow within 6-12 months to ensure the initiative in financial management.

6. Common mistakes in managing business cash flow

6.1. Do not follow the regular cash flow

One of the biggest mistakes of business is not tracking cash flow regularly and systematically. This leads to the business only discovered the problem when it was too late, such as when the bank account is nearly depleted, or when the business can't pay the expenses important.

The consequences of not tracking cash flow

• Not timely identification of financial risks: If there is no tracking system, businesses can not promptly detect these warning signs, such as declining revenues, costs spike or customers delayed payments.
• Easy to fall into the shortage of liquidity: Even if profitable business, but if there is not enough cash to pay operating costs, the business can still experiencing financial difficulties, serious.
• Possibility of penalties for late payment: failure to manage cash flow closely can lead to delays in payment of debts, affecting the reputation of the business and can lead to penalties from banks or partners.

The solution to tracking cash flow efficiency

• System settings report cash flow on daily/weekly: Business should have tables, track cash flow to control revenues and expenditures daily or at least weekly.
• Use accounting software to manage cash flow: The tool as AccNet, QuickBooks or Power BI helps automate the tracking cash flow, provide accurate data, early warning when there are unusual signs.
• Cash flow forecast in 3-6 months ahead: Forecast cash flow help businesses prepare for the stage has negative cash flow and find solutions in a timely manner.

6.2. Relying too much on profit that missed cash flow

Many businesses only focus on profit on financial statements without attention to the line actual money. However, the accounting profit does not accurately reflect the financial situation of the business. A company highly profitable, but if customers delayed payments or inventory rising, the business can still troubled about cash flow.

Case study: Business highly profitable, but bankruptcy because of negative cash flow

A business, ecommerce has a revenue of 200 billion/year, after-tax profit of 10 billion. However:

• 70% of sales come from customers who buy debt with a payment period of 90 days.
• Meanwhile, businesses have to pay suppliers within 30 days.
• Because of shortage of cash flow businesses to short-term loans with high interest rates to maintain operations.
• After only 2 years, the company insolvent due to repay the loan and the interest rate increases, which leads to bankruptcy even though accounting profit is still positive.

Solution to balance profit and cash flow

• Closely manage public debt customers: Applicable payment policies closely, require a deposit or reduce the time of payment.
• Optimize cash flow activities: Decrease in inventory is not necessary, negotiating payment terms better with suppliers.
• Planning cash flow instead of just relying on reported profit: Using models, cash flow management to ensure that the business always has spare cash.

6.3. Don't have a backup plan cash flow

Business cash flow can be affected by many factors such as declining sales, customer payments, costs or economic fluctuations. If there is no backup plan, cash flow, business will have great difficulty when unexpected situations occur.

The consequences of not having a backup plan cash flow

• When the market is experiencing volatility (for example, recession, disease), businesses do not have the cash reserves to maintain operations.
• Must go emergency loan with high interest rates, increasing the cost of finance.
• Lose the possibility of payment with suppliers, leading to disruption of the supply chain.

How to set up a reserve fund cash flow efficiency

• Maintain a reserve fund equal to 3-6 months of expenses activity: this helps the business can survive even when the revenue fell sharply.
• Create a source of redundancy: If the business has multiple sources of different (for example, selling products, services, attached), this will help reduce the risk if a revenue source is affected.
• Negotiate loans credit before you need: Instead of waiting for the deficiency in the flow of new money loan business should have the available credit limit from the bank to use when needed.

6.4. Cash flow management is poor due to lack of software support

Many small and medium businesses still manage cash flow manually on Excel or according to the sense, which led to the uncontrolled flow of money accurately and timely.

The consequences of not using the software to manage cash flow

• Take time in the synthesis of data, control over income and expenditure account.
• There is no early warning about cash flow problems, resulting in financial decision mistakes.
• Difficult to forecast future cash flows, reducing the ability of financial planning.

Solution: application of technology in financial management

• Accounting software integrated cash flow management: tools such as AccNet, Fast Accounting help track cash flow automatically, providing detailed reports on cash flow in/out.
• Software financial analysis and forecasting cash flow: Power BI, Tableau helps business trend analysis, cash flow, make decisions based on data.
• App AI in cash flow management: some modern platform can predict future cash flows based on historical data, to help businesses prepare ahead for difficult stages.

For example, A business e-commerce use accounting software to integrate AI to analyze cash flow in real time to help them detect early financial problems, adjust the plan in a timely manner.

Any business has the cash flow steady, accurate forecasting and control liquidity to good businesses that will have competitive advantages, strong, ready to capture growth opportunities overcome the difficult period.

By applying the method manage your business cash flowoptimize the cash cycle, using the software supports special is app AI to analyze cash flow, businesses can automate the monitoring financial decisions based on accurate data and predict risk before it happens.