How to Develop a Daily Cash Report
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Flow Statement
Free Cash Flow Analysis
Steps to Track Money In and Out of a Company¶
We have all heard CASH IS KING
and HE WHO HAS THE GOLD RULES
. I was talking with a business owner of a growing company. He was complaining about the lag between the time he had to pay his suppliers and employees and the time it took him to collect from his customers. He told me that is his biggest problem, and asked me how he could resolve it.
I said the solution is cash flow management. He looked at me and asked “what do you mean cash flow management?” I told him the most basic definition of cash flow management is delaying outlays of cash as long as possible, while encouraging anyone who owes you money to pay it as rapidly as possible.
He looked and me and said if he could do that he would not be talking to me. In reality he said his suppliers will not give him the credit he needs and his customers will not pay him when their receivables were due. I told him that his situation was normal and not unusual. He then asked what I would suggest for him to have good cash flow management.
I told him first of all, you can not manage anything if you can not measure it. So, you should consider preparing cash flow projections for next year, next quarter and, if you're on shaky ground, next week. The objective and results of an accurate cash flow projection is they will alert you to negative cash flow situations well before the money is not there.
However, you must understand that cash flow plans are not glimpses into the future. Cash flow plans are only estimates that will take into account such items as your customers' payment histories, your upcoming purchases, and your vendors' patience.
Additionally, to make an accurate projection you need detailed understanding of amounts and dates of upcoming cash outlays. This means you need to account for every dollar that will be spent, and on what it will be spent.
Secondly, you must manage and work your operating cycle. You know if you were paid for sales the instant you made them, you would never have a cash flow problem. Unfortunately, that doesn't happen in business to business transactions. You can still improve your cash flow by managing your operating cycle. The basic idea is to speed your operating cycle, which is the time it takes to turn materials and supplies into products, inventory into receivables, and receivables into cash. Some techniques for doing this include, offer discounts to customers who pay their bills rapidly, ask customers to make deposit payments at the time of ordering, issue invoices promptly, and follow up immediately if payments are slow in coming.
Another area to help your cash flow is to understand that sales growth will conceal problems. Don't be lulled into complacency by simply expanding sales. You need to watch expenses carefully. Any time and any place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them. You must use your cash wisely. Some ways to achieve this is to take full advantage of creditor payment terms. If a payment is due in 30 days, don't pay them early, consider using electronic funds transfer or credit cards to make payments on the last day they are due. And, don't always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.
With this information, he told me he is now prepared work on his cash flow management.