Cash flow management is an important part of running an enterprise as cash is like the lubricant which can help smoothen and clean an organization’s working and speed it up. That said, the lack of cash can also affect the working of an organization adversely, and cash mis-management isn’t something that’s not unheard of in industry.
Today we explain the finer points of how cash-flow works and ways to manage it using the best cash-flow accounting software.
- Terms of payments agreed to
Contracts and agreements are things on which the whole edifice of industry runs irrespective of types or verticals. Cash flow management irrespective of software and systems is about the terms of payments that exist on these contracts, as also if these contracts are still in use i.e., they have not expired. It thus makes immense sense to either draft fool-proof contracts, and seeing to it that all their terms and conditions as laid down are being adhered to. And cash management software is at the end, a reflection of what has been agreed in an agreement. For this reason, contracts should be water-tight, with no scope of dilution or changes either then or at a later point in time. If that happens, the best of cash flow accounting software could be of no use.
That said, to the extent possible, all the cash-related points in an agreement should periodically be updated in the existing cash management software so that there is no slip-up which could be quite costly.
- Terms of payments in the industry
Payment terms in an industry has an overarching effect on payment terms and cash flow management. Demand and supply have a direct bearing on cash-flows in an industry. Those where suppliers are few and demands high, cash and receipts come to suppliers very fast by reasons of monopoly. Conversely, where suppliers are many, cash receipt take time to come as buyers take their own sweet time given that they know the supplier is at their mercy. Between these two extremes, a supplier can have some leeway with buyers where the former has been servicing the buyer for a certain duration, and may have developed certain closeness to get receipt on time.
- Situation of the buyer’s industry and buyer’s payment status
A cash management software should to the extent take care to record the situation that exists in an industry and if the same affects or is likely to affect the cash payment terms. This is one feature that may have to be specifically incorporated as most software do not record subjective information. That said, cash payment is completely dependent upon the situation in the industry besides that particular enterprise’s own payment status. A case in point could be that of the petroleum industry worldwide where payment terms to lift any quantity or type of fuel is nothing short of 100% down-payment! Any relaxation on this is said to have a direct effect on the working of both the seller and buyers of petroleum, and also affect profitability.
- Status of supplies to the clients and quality of products (bad or slow products affect more)
Another factor that affects cash management of most enterprise is that of the status of supplies, and the quality of goods supplied. A case in point could be the recent complete lockdown. With supplies not moving out, suppliers were stuck with huge quantities of finished goods. In time, their cash flows became precarious. Help came only with the lifting of the lockdown and physical movements taking place. Likewise, supplies of low quality can also affect cash management as buyers can always refuse to pay or ask for replacement, an activity that adds to unpaid time.
- Status of the industry (seasonal or otherwise)
Industries including agriculture, especially fruits, are highly seasonal, and have a direct bearing on the quantum of cash available to suppliers who become ‘rich’ only at the time of final sale, and that too only at select times of the year. Rest of the time, they either depend upon other fruits, or sit tight and twiddle their thumbs.
- Systems to track receivables
Cash management systems including cash management software have a direct bearing on cash flows in an organization. Any company or entity that uses systems that are hard to update or operate will invariably record incomplete details which ultimately affects the authenticity and veracity of cash flows, and may adversely affect the working of any organization.