Cash Flow

Managing Your Cash Flow

Cash flow is the flow of money into and out of a business. It may also be specific to a single product or project. This movement of cash is measured for a specific period of time, to gauge the rate of return or value of a business and to determine its liquidity. Effective management of this flow of cash can enhance cash inflow and help maintain a healthy working capital.

Management Of Cash Flow

It is a process that monitors a company's cash flow through identification of cash inflows and outflows; and analysis. Based on this analysis steps are taken or adjustments made to augment inflow and to achieve a balance between inflow and outflow.

Inflow Identification n three types:

Operational: It includes cash earned through a company's internal business activities and assets changed to working capital.

Investment: Cash received from the sale of or spent on the purchase of long-life assets, also cash spent in acquisitions and investments.

Financing: Cash acquired from the issuing of cash dividends, adding or changing loans, share repurchases or debt repayments and selling more stock.

Outflow Identification

Outflow occurs in the form of operating costs, which include salaries, purchase of raw material and maintenance; dividends paid to investors and taxes.

Analysis

This is the study of the cycle of inflows and outflows over a period of time. Factors that influence the flow of cash like credit terms, accounts receivable, inventory and accounts payable are examined to forecast problems. Therefore, this process is called cash flow forecasting or projection. Most companies use software specifically designed to make this analysis and also forecast shortages and problems.

Adjustments

This refers to development and employment of strategies and steps to maintain necessary flow of cash. This is done through augmenting inflow and controlling outflow.

One of the biggest problems in cash flows arises out of late conversion or prolonged conversion period. Several steps can be taken to shorten this period. Prompt billing, shorter payment terms, avoiding potential bad debtors are some. Giving incentives like small discounts for early payments, persistent pursuit of collections and taking a part of the payment in advance for a work in progress are other ways to close the gap in cash flow.

Among means to augment inflow could be increasing sales involving cash payment, increasing prices, selling of obsolete or excess inventory, selling off surplus assets and speeding up work in progress.  

Outflow may be controlled through extending credit terms with suppliers, delaying the pay of dividend to investors, offering services or goods instead of money in exchange for commodities purchased. Companies could also seek to consolidate loans and reduce inventory.

Maintaining a balance in the flow of cash requires that the inflows outweigh the outflows. This is the main objective of cash flow management.