A Cash flow statement provides a more comprehensive picture of a business when looking for investors, an organization would want their cash flows to be straightened out meaning cash is king for any business, but cash flows show money managing strategies an organizations uses. An improved cash flow means that the organization is managing and allocating its resources effectively, so in other words, cash flows are the right representation of an organization’s financial health.
Entrepreneurs need to understand that making profits is not the only thing that keeps an organization going, actuality it’s how effective the organization’s money management policies are. Investors or other stakeholders when deciding to invest look at the cash flow of any organization.
It is said that cash flows are windows inside a business. So an organization’s monetary policy and money management have a direct impact on cash flows, the more effectively managed the money is, the more encouragement for investors to invest in the business.
In business, money comes in as sales and goes out as expenses. For a business to operate every day, one needs to keep track of the cash flow and make sure there is enough cash on hand to cover costs and other expenses. But there is more when understanding cash flows, an organizations operating cycle may involve processes like purchasing inventory, sales and receiving cash from those sales.
Every step the business goes through takes time depending on the nature of the industry the business exists in. Maybe it takes longer for the organizations to produce goods, so there is a lot of cash stuck in materials, or maybe you do business with organizations that do not pay quickly. The point being the shorter amount of time for a business to complete its process cycle the better the cash flow, which means that the organization gets cash back in hand fast.
This shows effective cash management policies when an organization knows how to get their money back the investors also stay optimistic about the prospects of their investments in the organization.
The purpose of the article is to highlight the importance of effective cash flows and stress upon some cash flow improvement tips to attract consumers and suppliers towards a business.
Performing Effective Forecasts
To improve cash flow, it is important for organizations to assess the current cash flow standing and decide where it can go in the future.
For a business to expand its capacity many of the small and medium-sized enterprises cannot stand the cost associated with growing operations. So forecasting should be effective, many companies get caught up in unfavorable cash flow movements that become really predictable if stakeholders did their homework beforehand. An effective forecast can help organizations make weekly targets to allocate cash better and know when to expect increases in expenses.
Revise Your Terms
If an organization is facing challenges maintaining cash flows, it is advised to evaluate the set payment terms and conditions. If the average payable is let’s say 20 days and the average receivable days exceed the average payable the organization has to work with their working capital to fill the gap.
It is better to evaluate the terms that an organization is offering its customers, whether it works for the stakeholders and in turn how the organizations customers are performing on those terms. With suppliers, the organization should evaluate how their terms affect others in the market place, and then reason out whether the offered terms by the supplier is suitable for your business conditions.
The key is to shorten the receivables gap so that the organization does have to use its working capital when performing their routine business operations.
For an organization to shorten its receivables gap, it is essential to have an effective collection system in place. Continuously evaluating the payment period, collections activities, the right amount of contact with the consumers and resolution of disputes put the organization in a better position to collect cash effectively and timely.
The same goes for an organizations payment towards its suppliers. Having a lazy payables department can hurt your chances to take advantage of discounts and contract renewals that work in the favor of the organization. By handing out payments on time businesses are better of making good supplier relations to negotiate future discounts or payment terms that fall in line with the business cycle.
Making Customer, Supplier and Inventory Priorities:
Rather than having a holistic approach towards your cash flow it is better to break it down into segments. Making priority-based decisions like who do we need to pay first, from where do we need to receive payments first, what do we need in our inventory most importantly than taking the right actions to achieve it.
This approach makes a business take the right decisions when improving the cash flow. This is how an organization attains awareness towards what is needed the most to do business without damaging the cash flow.
Having too much money tied up in stagnant inventories results in dead cash for an organization, not receiving timely payment from the organizations customers and being able to hand out timely payments shows an organizations lack of prioritization.
By breaking down your inventory needs, your customers and suppliers an organization is in a better position to shorten the business turn over cycle and hence have effective cash inflows and outflows.
Improving cash flows is a priority for an organization, it should be properly translated to the employees. Setting appropriate business targets such as collection and payment targets results in employee motivation.
Assigning the right roles for the job, working in collaboration with the employees and educate them about the needs and wants of the organization helps shape better working environments and improve cash flow cycles. Having reward systems in place and properly translated business objectives makes employees motivated.
It is said that employees that work with no set targets get demotivated quickly, therefore setting revenue goals, collection goals and inventory goals make the organization better of when improving their cash flows. It is also essential to take employee feedback towards certain cash flow policies and develop a policy that works for everybody.
Employees are the ones who know about the market changes first hand so an organization is better of working in tandem with its employees to have effective teams that help reduce the business turnover cycle.
Cash flows act as a lifeline for any business, the healthier the cash flow the healthier the business is. Cash flow does not only indicate the profit or loss of a company but rather it is the total picture the cash comes and leaves the organization. For businesses, it is important to understand the internal and external factors that affect day to day business and organizations to understand this it is essential that cash should be monitored, protected and out to work effectively.
Mathew Jade is a business, finance and technology blogger who spends his entire day writing quality blogs. He is a passionate reader and loves to share quality content prevalent on the web with his friends and followers and keeping a keen eye on the latest trends and news in those industries. For more updates follow him on Twitter @Mathew Jade