Managing Finance - Cash Flow Objectives

One of the most important tasks in effective financial management is to manage cash resources.

A clichéd but nevertheless relevant saying amongst bank managers goes like this:

Revenue is vanity

Profit in sanity

CASH IS KING

The logic behind the saying is straightforward.

Many businesses focus on growing revenues and take great pleasure from being boasting about the total sales they achieve. However, what if those sales are not profitable?

A business that runs out of cash is likely to become insolvent will fail without a further injection of finance.

By contrast, a business that generates strong profits and turns them into positive cash flow is in a much stronger position to achieve all of its objectives.

A variety of possible cash flow objectives might be set by a business depending on its financial position and corporate strategy. For example:

• Reduce bank borrowings to a target level – perhaps by repaying amounts owed under bank loans or restricting the use of bank overdraft facilities
• Minimise the time taken by customers who pay on credit to settle outstanding invoices – this is traditionally a major concern of smaller businesses and an obvious focus for a cash flow objectives
• Extend the period taken to pay suppliers to maximum permitted period – e.g. paying trade creditors at the end of any agreed credit period
• Building a buffer balance of cash as a precaution against unforeseen circumstances
• Minimising the amounts paid out in interest charges
• Reducing the seasonal swings in cash flow – perhaps by finding new uses for excess production capacity in quiet periods, or developing markets which are counter-seasonal to existing revenues