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8 Questions Frequently Asked About Cash Flow Management and Planning

Put your business or company in a strong position to achieving its “business goals” by managing and planning its cash flow.

 Cash flow is the lifeblood of any business or company and it also forms an important part of your business planning. Good cash flow management will ensure your business or company always has enough cash available to:

  • Pay its debts when they are due: and
  • Buy materials and assets when required.

This blog post will help you understand why cash flow management and planning are important and how you can use liquidity ratios.

Frequently Asked Questions (FAQs)

Here is a list of some FAQs that are often asked in relation to cash flow management and planning:

#1 – What is Cash Flow? 

Cash flow is the net amount of money received by a business or company in a given period. If cash flows are budgeted correctly, enough cash funds should be available to meet cash payments as they occur.

Reminder, cash flow should not be confused with profits and losses. You will find many businesses and companies have gone out of business, simply because they ran out of cash. 

#2 – What is Cash Flow Planning?

Cash flow planning is when you forecast short and long-term business expenses against the projected incoming cash.

Cash flow planning allows you to anticipate trouble by creating a cash flow cushion, for any unexpected expenses.

Cash flow planning is paramount to running a successful business or company and should be an essential part of your business plan.

#3 – Why is Cash Flow Planning Important?

You need to plan your cash flow so that your business or company does not end up in the following situations:

  • Not having enough money available to pay for materials, this will have the effect of sales falling;
  • Insisting that your customers or clients pay in cash, thereby losing them to competitors who let them pay by credit;
  • Not having enough cash to pay for overheads (i.e. bills, rent, etc.) and resulting in your business or company being forced to close down by its creditors.



Reminder.  Failing to Plan is Planning to Fail!

#4 – What is Cash Flow Management?

Cash flow management (also called cash flow forecasting) can be summarised as being the process of:

  • Monitoring, analysing, and optimising the net amount of cash receipts minus cash expenses.

Note 1: Net cash flow is an important measure of the financial health of any business or company.

Note 2: Cash flow management is important for all businesses and companies. However, it is critical for a start-up business. For example, if your business or company runs out of cash or you do not have any start-up cash and it is not able to obtain new finance, it will become insolvent.

#5 – What is a Cash Flow Statement?

A cash flow statement is a financial report. When used in conjunction with the rest of your financial report, it provides information that will show you:

  • How much cash is moving in and out of your business or company over a set period of time (i.e. it reflects your business’s liquidity); and
  • Whether your business or company is able to cover short-term expenses such as bills and staff wages.

Reminder. It is important to get a handle on your business’s or company’s cash flow so that you can:

  • Discern trends in cash management, and
  • Keep your business or company solvent.


#6 – What is Liquidity?

Liquidity is the amount of money that is readily available for investment and spending. It consists of cash, Treasury bills, notes, and bonds, and any other assets that can be sold quickly.

In business, liquidity reflects the ability of your business or company to meet its commitments as and when they fall due.

#7 – Why is it Important to Monitor Cash Flow and Apply Liquidity Ratios?

Monitoring your business’s or company’s cash flow and then applying liquidity ratios will help you to assess:

  • The amount of working capital you have in your business or company; and
  • How solvent is your business or company in the short to medium-term.

#8 – What are Liquidity Ratios?

Liquidity ratios are used to measure the financial health of a business or company.

The two frequently used liquidity ratios are the current ratio and the quick asset ratio.

Current Ratio

The current ratio (also called the working capital ratio) will indicate whether your business or company has sufficient cash flow available to meet its short-term obligations and take advantage of any opportunities.

Analysis. The current ratio will shed some light on the overall debt of your business or company. In other words, if your business or company is weighed down with a current debt, then its cash flow will suffer.

Formula.       Current RatioCurrent Assets

                                                         Current Liabilities

Quick Asset  Ratio

The quick asset ratio (also called the cash ratio or acid test ratio) will indicate. If your business or company has the ability to meet its immediate creditor demands.

Analysis. The quick ratio test measures the liquidity of your business or company by showing its ability to pay off its current liabilities with quick assets.

Formula.      Quick Asset RatioCurrent Assets minus Stock

                                                                 Current Liabilities


In summary, many businesses and companies fail because they do not plan and manage their cash needs. On the positive side, businesses and companies that plan and manage their cash flow effectively, find that they are able to improve their performance.

Finally, your ability to effectively manage and plan your business’s cash flow will determine your business’ or company’s success.


If you require more information or assistance, please call our “expert consultantstoday on 1300 4 SINGH, or simply click here to send a question.

DISCLAIMER: This blog post is of a general nature only and does not constitute professional advice. I strongly recommend that you seek your own professional legal and accounting advice in relation to your particular circumstances.

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