Cash flow management is the process of carefully tracking and managing the amount of cash coming into and going out of a business. It is a crucial aspect of financial management that helps businesses ensure that they have sufficient cash on hand to meet their short-term and long-term obligations. Effective cash flow management can help businesses avoid financial difficulties, such as running out of cash or defaulting on loans. It can also help businesses identify opportunities to invest excess cash and improve their financial performance. Imagine that a company called ABC Inc. has $100,000 in cash on hand. The company has several short-term obligations that it needs to pay, such as rent, salaries, and utilities. It also has a long-term loan that it needs to repay within the next year. To manage its cash flow, ABC Inc. creates a cash flow budget that outlines all of its expected cash inflows and outflows over the next month. The budget shows that the company expects to receive $50,000 in revenue from customers and $10,000 in interest income. It also shows that the company expects to pay $40,000 in salaries and $5,000 in utilities. After accounting for all of its expected inflows and outflows, the cash flow budget shows that ABC Inc. will have a positive cash flow of $15,000 at the end of the month. This means that the company will have enough cash on hand to meet its short-term obligations and make a payment on its long-term loan. If the company's actual cash inflows and outflows differ from what was predicted in the budget, ABC Inc. can use the budget as a tool to identify any potential issues and make adjustments to its spending or income-generating activities as needed. This can help the company maintain a healthy cash flow and avoid financial difficulties.
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