Cash flow is the general movement of cash or funds of a business. Cash comes from sales, collection, and sale of assets. The cash flow of a business is basically its lifeblood. The cash generated by businesses is used to meet debt payments and expenses of the business.
Positive cash flow techniques allow companies to have enough cash to meet its obligations. Sufficient cash guarantees that the requirements of a business can easily be covered if the company has it. There are several ways in which a business can increase its cash reserves. This includes collecting receivables, tightening credit requirements, taking out short term obligations, increasing sales, managing payables, and investing excess cash.
How exactly does this cash flow techniques work?
In collecting receivables, keep in mind that collections from your customers should be paid on time. Always make sure that all your billings and collection are working as efficiently as it possibly can. Have your clients pay you as soon as possible. Require deposits if possible and bill your clients on time so as to ensure that your collection will be paid on time. Keep your collection policies prompt and aggressive. When the billing is overdue, make sure to send a follow up billing to remind clients of past due accounts. Be very vigilant when it comes to your collection.
Tightening your credit requirements can also be a great way to increase your cash reserves. This cash flow technique requires you to be very upfront with your customers when it comes to credit terms. The tighter the credit requirements that you implement, the more customers will pay in cash and less in credit thus reducing probable losses and non collection. You could implement client questionnaires that can help you in deciding whether or not to extend credit to your customers or not. Also, it allows you to keep valuable information such as addresses and telephone numbers which you can follow up on in the event of past due accounts or non collection.
You could also employ short term obligations. In this technique, you can avoid the large cash out for large purchases and pay in several installments for your purchases. Because short term obligations are usually collected after sales, you can have a higher amount of cash reserve than you would if you would use all your cash for your purchases.
By increasing your sales, you are reflecting a higher amount of cash on your books. Of course, this will only work if most of your collections are paid in cash and not in terms. If the amount of credit sales is higher than that of cash sales, the tendency is to increase the accounts receivables instead of the cash. In order for this technique to work, it is best to use it side by side with tightening your credit requirements.
In managing your payables, the best thing to do it is to keep your cash longer on hand. This means that you should hold on to it as long as you possibly can without making the bills overdue so as to incur penalties and late charges. Manage your payables well by learning which creditor should be paid first and if possible, try to lengthen your payment terms with your creditors by negotiation.
Positive cash flow means that your business has enough cash reserves to pay obligations on time. Because of this, you can be assured that your business will remain in operation and will prosper thanks to proper handling of your investments.
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