September 26, 2023

Cash Flow Management: Definition, Stakes, and Optimization Methods

Rémi Legorrec

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Rémi Legorrec


CRO et Cofondateur

Cash Flow Management: Definition, Stakes, and Optimization Methods
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Cash Flow Management: What is it?

The concept of "cash flow management" is crucial for any business wanting to ensure its financial stability and optimize its operations. A company's cash represents the funds available to finance its daily activities, whether operational or investment-related. Cash flow management is thus the process that manages the inflow and outflow of a company's funds. It encompasses all activities related to the collection, concentration, and use of money.

What are the stakes of cash flow management?

  1. Preventing Payment DefaultA company unable to meet its short-term obligations finds itself in a payment default situation, often synonymous with decline or, at the very least, major challenges.Cash flow management aims to ensure the company's short-term solvency and to optimize the profitability of its financial resources. It's a continuous turnover between cash inflows and outflows, with the goal always being to maintain a positive balance.Proper cash flow management thus limits financial risks. For instance, if a company does not receive an expected payment from its clients, a well-managed treasury will allow it to cover its expenses.
  2. Enhancing the Company's Relationship with its Various Financial PartnersA good track record in cash flow management can make it easier to obtain financing, be it from banks, investors, or other financial institutions. It can also lead to better payment terms with suppliers. Indeed, cash is not merely a reflection of a company's ability to manage its liquidity, but also an indicator of its financial stability, reliability, and management competence.
  3. Realizing Savings on Banking FeesStill skeptical about its importance? Well-managed cash helps to reduce costs associated with banking services such as interest on loans, overdraft fees, and intervention commissions. Indeed, exceeding the authorized overdraft results in additional charges. Optimized management allows business leaders to foresee when cash financing will be necessary, thus providing an opportunity to seek more favorable financing options.
  4. Optimizing Cash Surplus to Increase ProfitsWhile a negative cash balance incurs additional costs for a company, poorly managed cash surplus isn't beneficial either.
  5. It's crucial to note that banks offer a multitude of options for those wishing to optimize their excess cash. These options vary based on each entrepreneur's goals:
  6. Invest the surplus for long-term returns,
  7. Allocate the surplus to finance future investments,
  8. Set aside the surplus as an emergency fund to cope with unforeseen events.
  9. However, before anything else, it's essential to determine if the company has indeed generated this surplus. How to achieve this? Through the establishment and regular monitoring of a forecasted cash plan.

What are the Key Indicators of Cash Flow Management?

To effectively measure a company's cash flow management performance, various key indicators are used:

  • Cash balance: Represents the difference between liquid assets and liquid liabilities. A positive balance indicates good company liquidity, while a negative balance may highlight a liquidity shortage.
  • Working Capital Requirement (WCR): Represents the difference between current assets and current liabilities. It highlights the resources needed to finance the company's operating cycle.
  • Stock turnover period: Measures the time taken to sell the stock. A short period typically indicates a quick stock turnover, which is favorable.
  • Customer payment period: Indicates the time taken by the company to collect payments from its clients. An extended period might signal financial difficulties due to payment delays.
  • Supplier payment period: Assesses the time a company takes to settle its supplier invoices. While a longer period can help optimize cash, it may also indicate financial strains.By regularly monitoring these indicators, it's possible to anticipate and identify cash-related issues. Proper management is vital to ensure the viability and sustainability of any business.

Understanding the difference between cash flow and profitability

It's crucial to note that cash flow and profitability are two distinct concepts, even though both are essential for a company's financial health.

Cash flow refers to the available money in the company, either in cash or in the company's bank accounts. It's a measure of the company's liquidity and cash flow. Cash flow enables a company to meet its short-term financial obligations, such as paying wages, suppliers, taxes, and other current expenses.

Profitability, on the other hand, measures the efficiency of the company in generating profits from its revenues. Profitability is calculated over a given period (usually a fiscal year) and refers to the profits made after deducting all expenses.

Therefore, a company might be profitable but still face cash flow issues. For example, if it hasn't received payments owed by its customers or if its regular expenses are too high. Conversely, a company might have healthy cash flow but be unprofitable, for instance, if it doesn't invest its resources effectively or if its production costs are too high.

In summary, proper cash flow management ensures the necessary liquidity for the company's daily operations, while high profitability indicates sound overall management of the company's activities. Both are vital for the sustainability and growth of the company.

What are the levers to optimize cash flow management?

To optimize cash flow management, several methods can be implemented:

  1. Cash flow statement: This essential tool allows for tracking the evolution of cash flow accurately. It records all incoming (sales, collection of customer receivables, etc.) and outgoing (purchases, wages, debt repayment, etc.) cash flows. Thus, the cash flow statement allows for visualizing the cash position at any moment and predicting short-term cash needs or surpluses. It's a vital tool for anticipating financing needs and avoiding liquidity crises.
  2. Managing the Working Capital Requirement (WCR): As explained, the WCR represents the amount of financial resources a company must mobilize to cover the operating cycle, from purchasing raw materials to cashing in sales. A high WCR means a lot of money is tied up in the operating cycle, which can strain cash flow. To optimize cash flow, managing the WCR effectively, such as reducing customer payment periods or extending supplier payment periods, is essential.
  3. Forecasted budget: This is an estimate of the company's revenues and expenses for a specific period (usually a year). The forecasted budget is essential for cash flow planning, as it allows predicting periods of surplus or cash shortages. Moreover, it helps identify the necessary financing sources to cover cash needs.
  4. Financing plan: The financing plan projects the financial resources the company will have and their usage for a future period. It includes both short-term financing (like bank overdrafts or supplier credits) and long-term financing (like loans or capital increases). A balanced financing plan ensures the company's solvency and contributes to its cash flow sustainability.
  5. Relationship with clients and suppliers: Properly managing relationships with clients and suppliers can help optimize cash flow. This might involve negotiating favorable payment conditions, like shorter payment terms for customers or longer ones for suppliers. Moreover, effective communication with clients and suppliers can help avoid payment delays and disputes that might disrupt cash flow.
  6. Investing cash surpluses: When a company has a cash surplus, it can invest it to generate additional revenues. This can be achieved through financial investments or investments in new projects or activities. This approach optimizes long-term cash flow management and contributes to company growth.


In conclusion, cash flow management is a vital component of a company's financial management. It requires special attention and proper planning to ensure the company's sustainability and growth. Remember that optimizing your cash flow management is an ongoing process that must adapt to changes in your business and economic environment.

By facilitating the management of your supplier and client accounts, Flowie allows you to maximize your cash flow and optimize its management. Click here to book a demo and understand how to address your cash flow challenges.

Rémi Legorrec
Rémi Legorrec
CRO et Cofondateur

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