Managing monthly cash flow is one of the basic components of maintaining financial stability, and it will help you attain your long-term financial goals. Whether you are an individual, a small business owner, or manage larger corporations, the ebb and flow of money in and out of your accounts can greatly impact your financial health.

Generally, your capability of managing these financial inflows and outflows largely determines your ability to consistently cover expenses, save, and invest, along with reducing debt.

In this article, we look at a series of practical tips and strategies that will empower you to navigate your way through the intricacies of monthly cash flow management. By implementing these insights, you will be able to work towards creating a more secure and prosperous financial future for yourself or your business.

Cash Flow: Why it Matters

Cash flow is the incoming and outgoing movement of money within or outside a business or an individual bank account over a given period.

Cash flow shows an entity’s net amount in cash generated from consuming or incurring liabilities in its capacity to meet financial commitments or maintain operational activities. Thus, it can be either positive or negative.

According to finance, cash flow can be divided into three common types:

• Operating cash flow measures money generated within the business from the core operations of sales and expenses like payroll, among others.

• Investing cash flow represents funds used for investing in long-term assets or budgets used to buy or sell investments.

• Financing cash flow includes any change in the capital structure of the business. It can mean borrowing money or repaying debt.

Managing monthly cash flow is important for both businesses and individuals because it enables them to ascertain their financial health. Hence, they can make informed decisions with respect to budgeting, investment options, and payment obligations.

Companies and individuals could closely monitor their cash inflow and outflow to ascertain that they have enough liquidity to cover expenses and meet financial obligations on time without facing unnecessary risks or running into cash shortages.

Calculate Cash Flow Accurately

Accurately calculating and monitoring your cash flow allows you to make knowledgeable judgments pertaining to allocating funds, planning for expenses, and having sufficient liquidity to meet the obligations you owe.

There are several important metrics you need to consider:

Days Sales Outstanding (DSO)

DSO measures the length of time that a business takes to collect payment after making a sale. It reflects the effectiveness of your accounts receivable process.

To calculate DSO, divide accounts receivable by average daily sales:

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days in Period

When your calculations reveal a lower DSO, you can expect quicker collections. A higher DSO, or vice versa, shows that your customers tend to pay slowly.

Cash Conversion Cycle (CCC)

CCC is another popular cash flow metric that analyzes the amount of time it takes a business to convert investments in inventory into cash inflows from sales. It also has three components: days inventory outstanding (DIO), days payable outstanding (DPO), and DSO.

CCC = DIO + DSO – DPO

DIO is calculated by dividing the average inventory by the cost of goods sold per day:

DIO = (Average Inventory / Cost of Goods Sold) x Number of Days in Period

DPO represents how long it takes to pay suppliers after purchasing inventory:

DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days in Period

By calculating this metric, you’ll be able to identify potential problems in your business and potential inefficiencies, thus optimizing cash flow management.

Operating Cash Flow (OCF)

Another important measure that’s used in cash flow analysis is operating cash flow (OCF). Usually, OCF shows the firm’s capability to generate cash from its core, normal activities like sales and services.

Calculating OCF involves deducting operating expenses from total revenue:

OCF = Total Revenue - Operating Expenses

Free Cash Flow (FCF)

Free cash flow (FCF) is the remaining cash flow generated by business operations after all costs and capital expenditures are deducted. The balance amount may be distributed among shareholders or used for reinvesting in business requirements. The formula is as follows:

FCF = OCF - Capital Expenditures

Cash Flow from Investing Activities

If you want to analyze the difference between the size of your investments in different long-term assets (including, property, plant, and equipment (PPE)) or buying/selling businesses, calculate cash flow from investing activities as follows: deduct the sale proceeds from the purchase cost.

Cash Flow from Investing Activities = Sale Proceeds - Purchase Cost

Cash Flow from Financing Activities

Cash flows from financing activities represent changes in borrowing or repayment of debt, the issuance of equity shares, the payment of dividends, or any other activity that affects the company’s capital structure:

Cash Flow from Financing Activities = Debt Issuance - Debt Repayment + Equity Issuance - Dividends Paid

Net Change in Cash

The net change in cash indicates whether cash inflows exceeded outflows during a given period. A positive net change implies an increase in available funds, while a negative net change indicates a decrease. The formula is as follows:

Net Change in Cash = Cash Flow from Operating Activities + Cash Flow from Investing Activities + Cash Flow from Financing Activities

Tips For Managing Monthly Cash Flow

Apart from knowing what cash flow is and how to calculate some cash-flow-related metrics, you should also know how to manage it properly. From tracking your income-expense level to taking advantage of payment plans, here are some valuable tips you should follow:

Track Your Income and Expenses

The first and most important tip in managing your cash flow is to track your income and expenses, and you should do it consistently. For example, you may start by recording different sources of income, whether it be rental income, salary, paychecks, or even some side hustles.

As for expenses, you should record and categorize them too. Seems quite easy? Yes! But you’ll be able to gather the necessary data and create an accurate budget for further analysis.

Create a Budget

As we mentioned in the previous point, by analyzing your expenses and incomes, you’ll be able to create a specific budget for you or your company that will align with specific financial goals.

This simple task will help you allocate money toward specific needs, whether they be utilities, events, transportation, or other business/individual needs.

Besides, you can even set aside some funds for future investments!

Prioritize Payments

Once you have created a budget and managed your cash flow, you should prioritize all your payments, but make sure to prioritize them by needs and urgency. For example, start with expenses of the utmost importance; these may include utility bills, rent/mortgage, credit payments, or even healthcare/insurance costs.

If you ensure that these payments are made on time, you’re on the first step to success since it will prevent potential penalties or late fees. After that, you can start allocating all the remaining funds—allocate them by priority towards debts with higher interest rates and outstanding balances.

Utilize Cash Flow Forecasting

No cash flow management can be conducted without forecasting. In simple words, it means analyzing historical data or projected changes in your incomes/expenses to estimate your future balance.

This technique allows you to identify and anticipate potential financial roadblocks beforehand. In this case, you can address any issues effectively - whether it be reducing discretionary spending or finding additional sources of income - or prevent them at all!

And with the new digital solutions available, this task couldn’t be easier!

Take Advantage of Payment Plans

Of course, managing cash flow can be hard and daunting. And if you find yourself struggling, why not consider negotiating payment plans with creditors? Practice shows that there are many accounts payable strategies that can suit any person’s needs!

Besides, many lender’s show great willingness to cooperate with those who really want to return their outstanding debts! By creating a new payment schedule, you’ll get temporary relief—and stabilize your financial position, of course!

Tools and Software for Cash Flow Management

Managing your cash flow can be quite easy with the simple tips and techniques mentioned above. But why should one do it in the age of new technologies and innovations that significantly improve and streamline the process?

One such innovation and useful tool is Tesorio’s Cash Flow Performance platform, which is totally changing the way businesses manage their cash flow. This platform can do all the above mentioned tasks with just one click of the mouse!

Tesorio uses artificial intelligence software that automates and optimizes the process. Thus, a business can create personalized collections workflows so as to ensure on-time payments from customers by customizing automated reminders and follow-ups.

The real-time analytics provided by Tesorio are of immense help in bringing your cash flow status to the forefront. Interestingly, it gives valuable information on outstanding receivables, pinpointing bottlenecks in the payment cycle and suggesting ways to avert any gaps in cash flow.

If you’re eager to experience the power of Tesorio firsthand, schedule a demo today with one of their finance experts!