If, as many experts agree, that the golden rule of business is “cash is king, inch then happiness in operation is a positive cash flow. Cash flow is the movement of money in and from your CashTab business over a defined period of time (weekly, monthly, or quarterly). If cash getting into your business is higher than the money losing sight of your business, your company has a positive cash flow. However, if your cash outflow is higher than the money inflow, your company has a negative cash flow. To manufacture a positive cash flow, generate more cash and collect the money in a more timely manner and at the same time, maintain or lessen your expenses.
Positive cash flow does not happen by chance; it happens because a well-defined financial management technique called “cash management” is functioning. A good cash management system helps to efficiently and effectively manage those things that produce cash. Maintaining an optimal level of cash that is neither excessive, nor bad is of the upmost importance. Augmenting cash inflows wherever possible is a mandatory practice. Two activities that accelerate cash inflows include invoicing customers as quickly as possible and collecting cash on past due accounts. Taking your time cash outflows until they come due is a critical step up good cash efficiency. Talking extended payment terms with suppliers also delays cash outflows. In addition, investing surplus cash to earn the highest rate of return is a good business practice.
In order to understand the magnitude and timing of cash flows, plotting cash movement, with the use of cash flow forecasts, is very important. A cash flow predict provides you with a clearer picture of your cash sources and their expected date of arrival. Identifying these two factors will aid you to determine “what” you will spend the money on, and “when” you will need to spend it.
Your financial canceling documents ought to include earnings Statement, a Balance Linen and a Statement of Cash Flows. Your “cash flow forecast” demonstrates the same three types of cash flow activities that can be found in your Statement of Cash Flows. The three types of cash flow activities are:
i Cash Flows from Operating Activities: This is the cash flow that is generated which is the direct consequence of the sales of your product/services.
i Cash Flows from Investing Activities: This is the cash flow that is generated from non-operating activities, such as, investments in plant and equipment or other fixed assets.
i Cash Flows from Financing Activities: This is the cash flow that is generated from external sources— lenders and investors.
These three types of cash flow activities are interrelated. They depend on, and affect each other. The money flow predict should take this under consideration, and provide a complete picture of where cash will come from and how it will be used for the time scale being estimated. The relationships between the different cash flow activities may depend on the character of your business, the stage of development of your business, as well as, general economic conditions, or conditions within the market or industry in which your business operates.
Cash outflows and inflows hardly ever occur together. In most cases, cash inflows appear to lag behind cash outflows, leaving your business short on cash. This weakness is your “cash flow hole. inch The money flow hole is the period (number of days) regarding the business payment of cash for goods and services purchased, and the receipt of cash from your customers for goods or services sold. In other words, inventory days on hand + receivables collection period — accounts payable period = the money flow hole. This interval, the money flow hole, must be loaned. Keep in mind the fact, that for each day your hard earned money flow hole is extended, so too is the amount of interest being gathered. Even when interest rates are low, the cost of financing can add up quickly.
Here are three ways your company can narrow its cash flow hole:
- Stretch out your payment terms on purchases for inventory. In most industries, payment terms are largely determined by tradition and vary from industry to industry.
- Shorten the collection period. The faster your company can collect money for products and/or services sold, the smaller its cash flow hole will be.
- Increase inventory turnover. The faster your company moves inventory, the less cash it takes. The key to managing inventory successfully is to continuously monitor your daily sales activity to your inventory on-hand.
Profit growth does not imply more cash on hand. Profit (or net income) is the difference regarding the company’s total revenue and its total expenses. It measures how efficiently your business is operating. Cash flow measures your company’s liquidity (the capacity to pay bills and other financial obligations on time). You cannot spend profit; you can only spend cash to pay suppliers, employees, the costa rica government, and lenders.
Many small enterprises have discovered that earning does not guarantee liquidity. Over time, your company’s profits are of little value if they are not with a positive net cash flow. To manufacture a positive net cash flow, generate more cash and collect the money in a more timely manner and at the same time, maintain or lessen your expenses. The four ways that can help your company to generate more cash, are:
- Increase sales by attracting new clients. Your business cannot sustain itself without the addition of new clients. New customer buy is a process that combines market data with direct marketing tools to name and reach high-potential prospects and convert those prospects into customers.
- Increase sales by selling additional product/services to existing customers. It is less expensive to generate additional business from your existing customer base than it is to generate start up company from new clients. A regular review of your clients’ buying history and frequency of purchases can reveal some interesting information about your clients’ buying habits.
- Generate more cash from each dollar of sales. More cash is generated because of increased profit margins authorized by increasing selling prices and reducing costs of goods sold.
- Reduce cost to do business. Cost to do business costs generally include facilities, equipment, admin and management personnel. The key is to make a larger volume of business cheaper.
Ideally, during your business cycle, money flowing into your business should be greater than money flowing from it. The build-up of a surplus cash balance is important because it enables you to plug cash flow holes when necessary, to pursue expansion initiatives, and to reassure lenders and investors that your business is in good financial health.