In business, we focus a lot on profit, but it’s easy to forget that operating with a positive cash flow can be just as important. Companies can be profitable and yet not have adequate cash flow – in a worst-case scenario, insufficient cash flow in a business over the long term leads it to bankruptcy.
To properly manage your business’s cash flow, you must first analyze the components that affect the timing of your cash inflows and cash outflows. A good analysis of these components will point out problem areas that lead to cash flow gaps for your business. Narrowing, or even closing, cash flow gaps is the key to cash flow management.
Some of the more important components to examine are:
- Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. To properly manage your cash flow, you must know the negative cash flow affects caused by the time it takes your customers to pay on their accounts.
- Credit terms. Offering trade discounts is one way you might be able to improve your cash flow.
- Credit policy. The correct credit policy is necessary to ensure that your cash flow doesn’t fall victim to a credit policy that is too strict or to one that is too generous.
- Inventory. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows.
- Accounts payable and cash flow. For optimum cash flow management, you’ll need to examine your payables schedule.
All five of these solutions improves your overall cash flow management and sets you up to solve cash flow problems before they occur in the future.
- Re-Negotiate Supplier Contracts.
- Improve Your Invoicing Processes.
- Incentivize Your Clients to Pay Faster.
- Stretch Out Your Payables.
- Reduce Expenses.
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This post was written by fdfadmin