Why CTOs Should Have A Cash Flow Management Plan

view original post

Dharmesh Acharya is the COO of Radixweb, a global tech consultation and bespoke software service provider.

Ask yourself today, how do you define wealth? For me, I’ve discovered that after over 20 years of experience, wealth isn’t what you earn as a business in a fiscal year but what you manage to keep after all your payouts.

From governments and banks to corporations and businesses in any industry, every establishment runs on cash flow. While governments levy a plethora of taxes, financial institutions squeeze out individuals and establishments through interests; then, corporations hike their rates for their services. For businesses, it’s crucial to have a wealth management plan for maintaining business continuity.

Cash flow optimization is the movement of money into, within and out of your business. Whether you run a Fortune 500 firm or a budding startup, every business requires some practical steps for delivering correct projections to reap the benefits of constant cash flow in the long run. CTOs need to dig into the story behind the trend that the cash flow of their businesses follows because this is what tells them where the oversights are.

Cash Flow And Enterprise Debt

At the core of cash flow management is the ground-level understanding that to be in business, CTOs need to ensure that their businesses’ earnings are higher than their savings. Only a cash flow analysis would reveal if a business generates enough to cover its ongoing expenses and debts.


• Cash Vs. Profit: A periodical analysis isn’t adequate when it comes to cash flow analysis. To clearly identify profits and cash, bookkeeping is an essential financial exercise. The first—profits—is merely an accounting principle for financial gain, and the second—cash—is a roundup of reserves at hand. Profit often includes receivables in the list, and only a cash flow analysis can reveal the outstanding amount.

• Cash Flow Vs. Marginal Cash Flow: It’s imperative for CTOs and CFOs to analyze the differences between cash flow and marginal cash flow as they put in place their short- and long-term financial plans. Cash flow is measured in terms of cash rolling in and out of a business over a period of time. Marginal cash flow is the financial repository left after working capital requirements are weighed against the cost of delivering services.

Categories Of Cash Flow

Let’s now dive deep into the categories of cash flow generated by organizations:

• Cash Flow From Investing: Investment cash flow registers cash generated through investment-related activities over a period of time, such as investments in securities for the long-term financial health of the organization or for research and development projects.

• Cash Flow From Operations: The cash flow from operations indicates if a business has enough funds to pay operational expenses through the sale of its tech services. Checking cash flow statement records quarterly helps weigh a firm’s ability in maintaining and expanding operational capabilities.

• Cash Flow From Financing: Cash flow from financing activities is a statement of the financial strength of the business to the investors and is an indicator of the financial structure. This statement shows the net cash flow used in transactions like resolving debts in the market and paying equities.

Important Enterprise Financial Statements

Every business has to have stock of three essential financial statements:

• The Balance Sheet: A periodical assessment of the firm’s liabilities and assets.

• The Income Statement: An indicator of a firm’s profit in a fiscal year.

• The Cash Flow Statement: A record of a firm’s cash transactions that ensure that all revenues from the income statement are met.

Here, CTOs and CFOs can ask themselves the following questions to determine the long-term growth of the business:

What’s the pace of growth for the business and the scope of the cash flow?

Does the business need any investment to fund long-term growth?

Does the business have enough financial reserves to fund six months of uninterrupted operations?

What’s the liquidation total of the firm’s investments?

The answers to these questions can give CFOs a solid idea about their organizational cash flow processes and allow them to determine a good course of action to maintain the financial health of the business.

Tick A Checkbox With Cash Flow Management Tips

It doesn’t matter what the scale of your business is—the basics of cash flow management are similar for all. Businesses with a raging growth rate need to have better control over the cash inflow and outflow so that the capital reserves are utilized judiciously. This calls for a very structured approach toward cash flow management.

1. Let the payment terms be yours. Extend your professionalism when it comes to your receivables and set uncompromisable payment structures. Levy late payment penalties and set conditions for legal action in case of defaults. A good customer who respects your work will value your terms.

2. Automate billing and collections. Automating the billing process will reduce manual errors, decrease staff costs and transition receivables into cash. By automating the collection system, a firm can get a quick overview of outstanding accounts and predict probable cash flow errors.

3. Bring in expense management. Every business needs an effective expense management plan for long-term gains along with a focus on the ongoing review of expenses. The goal should be building sustainable operational costs.

4. Improve conversion rates. Cash flow management can’t be just limited to tracking financial systems and automating processes. Most businesses fail in their efforts when it comes to bringing in conversions. The focus of any cash flow management plan should be on bridging the gaps through which potential customers are slipping away.

Having a cash flow management system in place means a certain investment. But the returns on this investment can be game-changing for your business.

Evaluating your financial situation after every quarter is a very important exercise that helps ensure that your technology business is making only smart investments. To secure long-term goals, CFOs need to make sure that there’s enough cash cushion to pull the firm through even occasional setbacks.

Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?