Cash Flow Statement - How to Improve Your Operating Cash Position


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What is Cash Flow - A revenue or expense stream that changes a cash account over a given period (as defined by Investopedia). Cash inflows usually arise from one of three activities - financing, operations or investing, whereas cash outflows result from expenses or investments.

Money flows into and out of a business in different ways, and it’s up to the business owner to use cash flow strategies to ensure there is money available. These strategies should begin with analysing the company’s operating cash position by preparing a cash flow statement. It’s easy to understand the structure of a cash-flow statement by viewing an online example, such as the 12 Month Template available from the Service Corps of Retired Executives (SCORE) website.

A 12-month statement analyzes cash receipts over a year’s time and includes two types of financial data: Cash Receipts (or accounts receivable) and Cash Paid Out (or accounts payable). Under Receipts, look at transactions coming in, including sales, money collected on receivables, and loans or other injections of money.

Cash Paid Out has many more categories, including purchases, gross wages, payroll, taxes, and other operating costs (including outside services, supplies, rent, utilities, insurance, repairs, advertising/marketing, accounting and legal, interest, and miscellaneous expenses). Net positive cash flow is desirable (or when inflows are greater than outflows). A small business should avoid the opposite position, or borrowing when there is negative net cash flow, which occurs when outflows are greater than inflows.

Cash flow management helps to ensure positive cash balance. Try these five strategies to make your cash flow as predictable as possible:

Examine How Your Business Bills Clients

Your business has accounts receivables, or bills that you send out to customers and then await their return payment. A basic concept of sound cash-flow management is reducing the lag time between when an invoice is sent out to the customer and when payment is received. Reducing this lag time improves your net operating cash position. For example, when customers pay online by credit card, the lag time is less than if you wait for the customer to mail a check and then deposit it in your bank account. With an electronic accounting system, you can determine the schedule on which customers are billed. For instance, you might bill some customers on the first of the month and others on the fifteenth of the month.

Analyze the Age of Your Accounts Receivables

Once you’ve set up your billing system, study your accounts receivables. How old are your unpaid accounts? Any customer who is current helps you keep cash on hand. Bills that are past due by 30 days, 60 days, 90 days, or more are examples of customers that reduce your cash inflows. Set up your electronic accounting system to generate invoices to customers with stronger language so they will bring their accounts current.

Pay Suppliers on Different Schedules

You can use different strategies to pay out those companies that supply your business. Establish business arrangements with suppliers to pay at agreed intervals, sometimes many business days after they have delivered their goods or services. If you are offered to pay one or two months after delivery, then that is a program that essentially permits your business to buy now and pay later. Meanwhile, you will have cash in the bank to use for short-term priorities, such as buying out a competitor’s inventory.

Use Different Pricing Strategies

If you have a business that provides construction services, for example, adjust pricing strategies based on the kind of customer. Your business might perform construction projects for homeowners, small businesses, government agencies, and non-profits. You can charge on a project basis for big clients and on a piece-by-piece basis for homeowners. This pricing strategy ensures that different kinds of payment flow into the business. This is not right for every business because some companies only sell one kind of product or service. Their profit margin is based on volume sales of that one kind of sale.

Keep Pricing Consistent With the Economy

Analyse your financial arrangements with customers and suppliers to ensure that you are receiving market-based compensation for goods or services and that you aren’t paying too much for supplies. You might need to renegotiate prices with customers and suppliers whenever you find you’re getting too little or paying too much. Look at all contracts at least once a year.

If you remember anything about operating cash flow, it should be that you need enough cash on hand to meet ongoing expenses and unexpected expenses. You don’t want to pay more interest than you should by borrowing from a business credit card or line of credit to meet unexpected expenses. You want money available when you need it!

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