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Managing Cash Flow

Managing Cash Flow

The best advice you can ever give any business leader is:

“Never run out of money”

In business therefore, nothing is more important than the management of cash flow and good cash management will help to maximize the profits earned.  Although maintaining positive cash flow is a commonsense goal that almost all business leaders will subscribe to without question, according to the major financial institutions like the banks, “lack of cash flow” remains by far the number one reason for businesses failing or “going to the wall.”

Cash flow budget

So, if it is cash that acts as the lifeblood of business, then the ongoing flow of cash is of critical importance and needs very careful management. This is most effectively done by using a cash flow budget which will anticipate the need for additional cash before the situation becomes critical (and well before the cash runs out of course). Leaving the situation until a crisis occurs can endanger the existence of the business or lead to very expensive emergency borrowing.

Another important part of monitoring cash balances (other than making sure that there is enough money to pay all of the bills, today, this week and this month) is the management of risk. By effective cash flow risk management the organization can ensure that a possible catastrophic event in the near future (in a few weeks or even a few months) will not destroy it. A smart organization should therefore also design and execute an investment strategy which will provide funds as required in the short-term and long-term (and these can be quickly drawn upon when and if needed).

Cash flow rules

Naturally, the amount of cash required by a business will depend upon a number of factors, however the guiding rules are:

  • There must be enough money available on pay days to pay all employees. The various employment agreements and contracts require that all employees be paid what is due to them every pay day. Failure to do so is regarded as a serious breach of employment regulations and may cause so much disruption and reputational damage that a business fails anyway.
  • Suppliers must be paid on time, otherwise they may withdraw supply. Usually, there is some leeway given by suppliers to regular customers (such as allowing payment terms to “drift out” from 30 days to 60 or from 60 to 90 days for instance). However, abuse of the relationship will ultimately lead to materials or services not being made available. This could be very quickly fatal to the business.
  • Any due taxes must be paid on time. This includes any income tax withdrawn from employees’ wages and salaries. Failure to pass on this tax promptly will lead to a formal warning letter from the tax authorities and potentially heavy fines.
  • Services, such as telephone, electricity, water and gas must also be paid for promptly or they will be cut off with little warning. Providers of these services are not nearly as complacent as they used to be about slow payment.
  • Lease payments on premises or equipment will typically be made in advance on a monthly basis Additional interest accrues on late payments and the equipment may be seized or repossessed if payments are badly overdue. In recent times, poor occupancy rates of commercial property have made landlords a little more tolerant of late payments but it should not be relied upon.


Nothing in business is more important than the effective management of cash. Cash is the lifeblood of business. Therefore, the management of all organizations must make the budgeting of cash flow and the management of cash resources a priority. In addition, in order to ensure that that there are no major unplanned losses of cash due to catastrophic events the organization must be involved in developing an efficient cash flow risk management approach.

  • The cash budgets and the risk management strategy must be continually monitored to ensure that no economically avoidable risks are being taken.
  • By the judicious use of existing cash at hand, prior investments and the effective use of temporary borrowings, management can maintain adequate cash flow for the short, medium and long-term.
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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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