Cash flow management

In the business process of each organization the most important goal of the manager is tomaximize the wealth of the organization in which profit is often considered the highest priority. However, if you only care about profit but do not control the cash flow well, you will have many difficulties in operation. So how important is cash flow to businesses?

Firstly, the cash flow and profit are not the same. For a store or small establishment the income or expense of themis usually receivedor paid in cash so the cash flow and profit earned will be nearly identical. In an economy that uses a lot of cash like Vietnam, these two concepts are often considered to be the same despite differences. However, for businesses the difference between the two concepts becomesimminent because customers and suppliers may not pay immediately but will payit later or installmentsdepending on the agreement between them and the company.

In the long run, once a business has made a profit, profit will generate cash inflows, but the important difference is time. Timingdifference can be crucial for a small business. For example, when an enterprise sells goods and allows customers to pay 30 days deferred payment, it will immediately record revenue for this order according to accounting regulations. However, businesses stillhave not received the money. Enterprises only have money when customers pay ... Thus, it can be seen that revenue is not consistent with the cash inflow. Similarly, when an enterprise imports goods for sale, the business pays for the goods, but this cash outflow is not considered as the cost until the business sells goods. A fairly common phenonmenal among small and medium-sized businesses is fast growing, but the profits far exceed the actual cash received. This type of situation makes small and medium enterprises easily run out of cash.

In the absence of cash, large enterprises can raise capital by increasing their capital contribution or from borrowed capital, however, SMEs are not so easyto use these methods. Limitedcapital is one of the biggest barriers to the growth of SMEs. And in this case, if there is no funding for this negative cash flow, the business will fail.

Cash flow issues arise in an SME for two main reasons:

+ SMEs cannot sell goods, thereforethey do not have revenue to cover expenses.

+ Enterprises have revenues and profits but cannot control the cash flow.

The business has not developed a cash flow management plan, no good internal management and financial management processes to support the business. Enterprises only focuson revenue and cannot control cash flow, thenthey meet difficulties in collecting moneyand store too much inventory.

Many SMEs mainly focus on profitability - before or after tax. Although cash flow and profits are important in business, cash flow is considered to be the blood of an businesses. Just as the blood on each person's body transports throughout the body to feed the organs. If the body loses too much blood, it will lead to death. The same is true in business: having no cash flow to finance forits operations, this will lead to a halt of the company's operations. Large enterprises can maintain a negative cash flow for a period if theyhave a large amount of savings, or the ability to borrow quickly and ontemporary basis from banks, most SMEs are not eligible to do these things, Therefore, a negative negative cash flow will eradicate a business if market conditions or business sectors encounter prolonged fluctuations.

And so, SMEs need to understand the cash flow and develop and implement the cash flow management plan. Without a plan to manage cash flow, it is very difficult for businesses to control their cash flow and forecast cash demand so that they can have a plan to finance cash flow shortages.

As such, SMEs often face the situation of unable to control cash flow and therefore this become their biggest problem. An important keypoint to effective cash flow management is budgeting and cash flow forecasting. All businesses - large and small - should prepare a financial plan. Usually, SMEs should plan their annual budget including monthly revenue estimates and expenses. From this source, SMEs will have a database of income and cash flow monthly. The budget predicts the profitability of the business, while the cash flow projection predicts net cash flowfor subsequent periods. Based on the projection of cash flow, SMEs will have a plan to use cash sources more appropriately and raise capital in cases of cash flow shortage. Just like an individual or a family, businesses need a contingency and a reasonable spending plan. This gives them security during periods of unstable businessenvironement. It also provides an opportunity to utilize the strategic investments or cut costs.