If, as many experts agree, that the golden rule of business is “cash is king, inch then happiness in business is a positive cash flow. Cash flow is the movement of money in and from a business over a defined Ecash wallet period of time (weekly, monthly, or quarterly). If cash coming into your business exceeds the income losing sight of your business, your company has a positive cash flow. However, if your cash outflow exceeds the income inflow, of course your company has a negative cash flow. To manufacture a positive cash flow, generate more cash and collect the income in a more timely manner and at the same time, maintain or reduce your expenses.
Positive cash flow does not happen inadvertently; 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 these activities that produce cash. Maintaining an optimal level of cash that is neither excessive, nor second class 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 in good cash conservation. Fighting for 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 essential. A cash flow estimate provides you with a clearer picture of your cash sources and their expected date of arrival. Identifying these two factors will encourage you to determine “what” you will spend the income on, and “when” you will need to spend it.
Your financial coverage documents ought to include an ongoing revenue Statement, a Balance Bed sheet and a Statement of Cash Flows. Your “cash flow forecast” reflects the same three types of cash flow activities that appear 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 reaction to 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 income flow estimate should take this into account, and provide a complete picture of where cash will come from and how it will be used for the period 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 seldom occur together. In most cases, cash inflows often lag behind cash outflows, leaving your business short on cash. This weakness is your “cash flow hole. inch The income 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 income flow hole. This interval, the income flow hole, must be loaned. Keep in mind the fact, that for each day your cash flow hole is extended, so too is the amount of interest being accrued. 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 needs. The key to managing inventory successfully is to continuously monitor your daily sales activity to your inventory on-hand.
Profit growth does not mean 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 capability 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 business owners have discovered that earning does not guarantee liquidity. Over time, your company’s profits are of little value if they are not accompanied by a positive net cash flow. To manufacture a positive net cash flow, generate more cash and collect the income in a more timely manner and at the same time, maintain or reduce 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 acquisition 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 far 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 a look at your clients’ buying habits.
- Generate more cash from each dollar of sales. More cash is generated because of increased profit margins made possible by increasing selling prices and reducing costs of goods sold.
- Reduce cost. Cost 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 accumulate 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.