Cash Flow Management Basics

Tax Professionals' Resource
October 10, 2012 — 1,089 views  
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Cash Flow Management Basics

Every company has at one time or another encountered issues pertaining to an uneven cash position. Properly managing cash flow is critical to lowering a company’s costs of money, and it is a practice where enterprises must combine alternative financing options with proactive cash flow management strategies. After all, a company must cover its daily operating expenses, while still maintaining enough working capital to fund its long-term future. In fact, a company could generate significant gross profit on sales and yet still be burdened by poor cash flow. As such, here are some simple strategies to make sure that cash flow is no longer a going concern.

Alternative Financing Options: Receivable factoring, purchase order financing and inventory financing are all asset-based lending options that help companies improve cash flow. They allow companies to use the liquidity of existing assets in order to build a line of credit, one where each receivable, customer purchase order and inventory count is used as a form of collateral. These alternative financing options are especially popular in industries where customers enjoy preferential credit terms, and or situations where companies take long to collect on receivables.

Prepayment & Partial Prepayment: Offering prepayment and partial prepayment discounts allows companies to secure immediate cash, thereby reducing their costs of capital and lowering their financing on sales. However, it’s not enough just to offer prepayment options to existing customers; companies should also focus on offering prepayment reductions to customers with poor credit ratings or customers who must prepay. After all, very few companies focus on sales to customers with poor credit ratings. This makes them an easy source of immediate capital.

Prompt Payment Initiatives: Offering customers net-10 day terms with a 1 to 2 percent invoice discount is another proven solution to improving cash flow. Companies are always looking for ways to save money. Offering invoice reductions for prompt payment is one way to improve cash flow, and it also helps customers reduce their own costs of purchases. 

Inventory Clearances and Price Reductions: Liquidating outdated and obsolete inventory always helps to free up capital. Companies that are proactive in inventory clearances are ones that reduce their cost of capital and maximize their gross profit on sales. Another solution includes using reduced pricing to move slow moving inventory.

Finally, it’s always a good idea to track the amount of raw material, semi-finished inventory and damaged inventory within a company’s warehouse. When companies terminate a product offering, they are often left with inventory counts that have no long-term use. Several enterprises sell their excess raw material and damaged inventory in times of need.

 

Tax Professionals' Resource