If you’re looking for a simple definition of CFM, it’s usually defined as the management and analysis of a company’s cash flows. When done right, cash flow management allows a company to estimate the amount of money they will have on hand at any given moment, and to predict trends in available cashflow to evaluate your business’s financial position ahead of time. This predictive analysis can be the difference between success and failure for a small company.
The Three Key Elements of Cash Flow Management
Let’s break it down.
- Accounts Receivable: What do the clients owe the business?
- Accounts Payable: What does your business owe to suppliers?
- Shortfall: Any negative difference between what your business is owed, and what you need to pay out.
Understanding your shortfall is the foundation of good cash flow management, and allows you to meet your goal of having enough cash on hand when you need it.
Understanding the Start-Up Burn Rate
When your business is established, these numbers might become more predictable from month to month, but as a start-up, there can be extreme fluctuations in cash flow, for example – after your business receives a big cash influx through investors or VCs. When your start-up is new, you expect there to be money disappearing at a fast rate, through new hires, product development, essential hardware or initial investments. The rate at which your organization ‘burns through’ their money is known as a burn rate. A thorough understanding of your burn rate literally tells you how long you can stay afloat before you start adding to your accounts receivable each month.
Cash Flow Management Made Simple
Managing your cash flow, onboarding the tools you need and working out how to make improvements or changes that can slow the burn rate and shortfall each month is the job of your CFO. Often, a CFO will use cash flow management tools to make this simpler. These can be built in into pre-existing financial tools, or be standalone applications or technology.
Built-for-purpose tools include PlanGuru, Float, Scoro, Quickbooks, Pulse, and Cashanalytics. On the other end of the spectrum, many businesses use Microsoft Excel or Google Sheets for cash flow management, and often you’ll see that accounting and ERP applications support exporting the financial data to an Excel or Sheets doc for this specific purpose. Whatever choice you make, essential elements include:
Accuracy: All ledgers and financial data needs to be 100% correct and up to date at all times, with no duplication, blind spots, or delays.
Simplicity: A complicated system will have a steep learning curve, and may dissuade employees from using it. Onboarding should be intuitive and straightforward.
Shareability: Financial information and cash flow should be able to be reported on to the board level with ease. This may include graphics, charts or summaries of data.
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If your business is thinking about onboarding virtual CFO services to handle cash flow management and other vital financial tasks for your start-up, you want a company that understands the tools to make this simple. Give Nations a call today, and let’s discuss how to slow your burn rate and onboard the right technology for your business needs.
