Cash flow management – introduction
In an ideal world, a business will experience a consistently
positive cash flow – i.e. the amount of cash coming into the business (cash
inflow) is greater than the cash going out of the business (cash outflows)
This would allow a busness to build up cash reserves with which to
plug cashflow gaps, seek expansion and reassure lenders and investors about the
health of the business.
However, it is important to note that income and expenditure
cashflows rarely occur together, with inflows often lagging behind.
An important aim of effective financial management must be to
speed up the inflows and slow down the outflows.
Cash inflows
The main cash inflows are:
- payment for
goods or services from customers
- receipt of a
bank loan
- interest on
savings and investments
- shareholder
investments
- increased
bank overdrafts or loans
Cash outflows
The main cash outflows are:
- purchase of
stock, raw materials or tools
- wages, rents
and daily operating expenses
- purchase of
fixed assets - PCs, machinery, office furniture, etc
- loan
repayments
- dividend
payments
- income tax, corporation
tax, VAT and other taxes
- reduced
overdraft facilities
Many of the regular cash outflows, such as salaries, loan
repayments and tax, have to be made on fixed dates. A business must always be
in a position to meet these payments, to avoid large fines or a disgruntled
workforce.
To improve everyday cashflow a business can:
- ask
customers to pay sooner
- chase debts
promptly and firmly
- use
factoring
- ask for
extended credit terms with suppliers
- order less
stock but more often
- lease rather
than buy equipment
- improve
profitability
Cashflow can also be improved by increasing borrowing (lending),
or by putting more money into the business. This is acceptable for coping with
short-term downturns or to fund growth in line with the business plan, but
shouldn't form the basis of day-to-day cash flow management.
please read out:BUSN 2036 Financial Accounting issues
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