What is max­i­miz­ing busi­ness cash flow?

In the begin­ning stages of a busi­ness, cash is often the most impor­tant fac­tor for ensur­ing suc­cess. It is vital, there­fore, for busi­ness­es to pre­dict and con­trol cash prop­er­ly. Most busi­ness­es begin to man­age cash by con­struct­ing cash flow state­ments and oth­er fore­cast­ing tools. Cash flow is a mea­sure­ment of the amount of cash flow­ing into and out of a busi­ness dur­ing a spe­cif­ic time peri­od, such as a week or a month. At the end of the des­ig­nat­ed time peri­od, if a busi­ness has received more cash than it has spent, it will have a pos­i­tive cash flow. By ana­lyz­ing its pro­ject­ed cash flow state­ments and its actu­al cash flow state­ments, a busi­ness can devise ways of max­i­miz­ing cash flow. A pro­ject­ed cash flow will serve as a major bud­get­ing tool because it will give you an idea of your cash needs well in advance.

Cash flow should not be con­fused with sales or prof­its; it is not uncom­mon for a small com­pa­ny to make a sig­nif­i­cant sale or be oper­at­ing prof­itably and still go broke because of insuf­fi­cient cash flow. This can hap­pen, for exam­ple, when the com­pa­ny does­n’t get paid for sev­er­al months after its prod­uct has been deliv­ered. In the mean­time, the com­pa­ny may run out of cash when try­ing to pay cur­rent expens­es. If you price your prod­uct too low and have high expens­es, you may also run out of cash.

How does cash flow into and out of a busi­ness?

Sources of cash

Most busi­ness­es start with an ini­tial cash invest­ment made by its own­ers. As the busi­ness makes sales, it gen­er­ates cash as well. If a busi­ness needs more cash, it can look to bank loans or addi­tion­al invest­ments by the own­ers or oth­ers (equi­ty or debt financ­ing).

Uses of cash

Busi­ness­es use cash in a num­ber of ways. Cap­i­tal expen­di­tures are made when a busi­ness uses its cash to invest in its own build­ings, equip­ment, and oth­er fixed assets. Cash is also used to repay debt to those who’ve lent mon­ey to the busi­ness, and to pay salaries or div­i­dends to busi­ness own­ers. Addi­tion­al­ly, of course, cash is used to pay cur­rent expens­es (e.g., util­i­ties, employ­ee wages, and oth­er peri­od­ic bills) and to acquire cur­rent assets (e.g., office sup­plies).

How do you con­struct a cash flow state­ment?

The state­ment is divid­ed into four major sections–starting cash, cash in, cash out, and end­ing cash–which should be list­ed on the left side of the doc­u­ment. Across the top of the doc­u­ment, you should list appro­pri­ate time peri­ods (e.g., Jan­u­ary, Feb­ru­ary). A typ­i­cal cash flow for a small com­pa­ny is laid out to cov­er a year. There­fore, you need to be able to esti­mate sales and peri­od­ic inflows of cash, as well as pro­ject­ed out­flows of cash.

You list your start­ing cash bal­ance (as of a par­tic­u­lar date) at the top of the doc­u­ment. Your cash in sec­tion should be sub­di­vid­ed into sec­tions, such as:

  • Cash sales
  • Col­lect­ed receiv­ables
  • Oth­er

Like­wise, your cash out sec­tion should be sub­di­vid­ed into sev­er­al cat­e­gories, such as:

  • Rent
  • Pay­roll
  • Util­i­ties
  • Office sup­plies
  • Accounts payable
  • Debt repay­ment
  • Oth­er

Obvi­ous­ly, the more spe­cif­ic you can be, the more help­ful the cash flow state­ment will be. At the bot­tom of the cash in sec­tion, include a line for total cash in. At the bot­tom of the cash out sec­tion, include a line for total cash out.

Next, sub­tract your total cash out from your total cash in. If the result is a pos­i­tive num­ber, you have a pos­i­tive cash flow for the month. If the result is a neg­a­tive num­ber, you’ll need to ana­lyze the state­ment to see where you can cut back. The final num­ber on your state­ment will be the end­ing cash. This con­sists of your start­ing cash plus your cash flow fig­ure.

Here is a sam­ple cash flow state­ment:

Cash Flow — Month End­ing March 31, 201X
Start­ing Cash $10,000
Cash In
Cash sales 50,000
Col­lect­ed receiv­ables 20,000
Oth­er 20,000
Total Cash In $90,000
Cash Out
Rent 3,000
Pay­roll 15,000
Util­i­ties 1,000
Office sup­plies 500
Oth­er 40,000
Total Cash Out - 59,500
Change (cash flow) $30,500
End­ing Bal­ance $40,000

How can you ana­lyze a cash flow state­ment to max­i­mize cash flow?

A cash flow state­ment can help you to max­i­mize your cash flow by uncov­er­ing cer­tain cash-relat­ed prob­lems. Because it can also help you to project the amount of cash your busi­ness will have com­ing in and going out on a month­ly basis, it can also help you to deter­mine how much mon­ey you may need to bor­row from a bank or obtain from investors. You can max­i­mize your cash flow by effec­tive­ly man­ag­ing the out­flows and inflows of cash.

Man­age the out­flow of cash

You can decrease the out­flow of cash by cut­ting back on some of your expens­es. For instance, you can move to cheap­er offices to cut back on rent, reduce the hours of your employ­ees to low­er the expense of wages, exam­ine tele­phone bills and office sup­plies care­ful­ly, and cut back on own­ers’ salary with­drawals. In addi­tion, you can con­sid­er leas­ing expen­sive assets instead of pur­chas­ing them out­right.

You can also push for more favor­able cred­it terms with cred­i­tors. For instance, if you cur­rent­ly have to pay your accounts payable in 30 days, you might rene­go­ti­ate so that pay­ments can be made in 60 or 90 days. In gen­er­al, you can min­i­mize your financ­ing costs by accel­er­at­ing your income from cus­tomers while slow­ing your pay­ments to cred­i­tors.

Man­age the inflow of cash

You can increase the inflow of cash by tight­en­ing cred­it poli­cies with your cus­tomers and aggres­sive­ly col­lect­ing receiv­ables. Try giv­ing small cash dis­counts to cus­tomers who pay their bills in a time­ly fash­ion. Also, think about wire-trans­fer pay­ments to speed up receipt of pay­ment. You can also try to keep your inven­to­ry as low as pos­si­ble, seek up-front pay­ments, increase prices, and step up sales efforts.

For fur­ther assis­tance please con­tact your Wealth Advo­cate at Mack­ey Advi­sors.

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What is max­i­miz­ing busi­ness cash flow?
In the begin­ning stages of a busi­ness, cash is often the most impor­tant fac­tor for ensur­ing suc­cess. It is vital, there­fore, for busi­ness­es to pre­dict and con­trol cash prop­er­ly. Most busi­ness­es begin to man­age cash by con­struct­ing cash flow state­ments and oth­er fore­cast­ing tools. Cash flow is a mea­sure­ment of the amount of cash flow­ing into and out of a busi­ness dur­ing a spe­cif­ic time peri­od, such as a week or a month. At the end of the des­ig­nat­ed time peri­od, if a busi­ness has received more cash than it has spent, it will have a pos­i­tive cash flow. By ana­lyz­ing its pro­ject­ed cash flow state­ments and its actu­al cash flow state­ments, a busi­ness can devise ways of max­i­miz­ing cash flow. A pro­ject­ed cash flow will serve as a major bud­get­ing tool because it will give you an idea of your cash needs well in advance.
Cash flow should not be con­fused with sales or prof­its; it is not uncom­mon for a small com­pa­ny to make a sig­nif­i­cant sale or be oper­at­ing prof­itably and still go broke because of insuf­fi­cient cash flow. This can hap­pen, for exam­ple, when the com­pa­ny does­n’t get paid for sev­er­al months after its prod­uct has been deliv­ered. In the mean­time, the com­pa­ny may run out of cash when try­ing to pay cur­rent expens­es. If you price your prod­uct too low and have high expens­es, you may also run out of cash.
How does cash flow into and out of a busi­ness?
Sources of cash
Most busi­ness­es start with an ini­tial cash invest­ment made by its own­ers. As the busi­ness makes sales, it gen­er­ates cash as well. If a busi­ness needs more cash, it can look to bank loans or addi­tion­al invest­ments by the own­ers or oth­ers (equi­ty or debt financ­ing).
Uses of cash
Busi­ness­es use cash in a num­ber of ways. Cap­i­tal expen­di­tures are made when a busi­ness uses its cash to invest in its own build­ings, equip­ment, and oth­er fixed assets. Cash is also used to repay debt to those who’ve lent mon­ey to the busi­ness, and to pay salaries or div­i­dends to busi­ness own­ers. Addi­tion­al­ly, of course, cash is used to pay cur­rent expens­es (e.g., util­i­ties, employ­ee wages, and oth­er peri­od­ic bills) and to acquire cur­rent assets (e.g., office sup­plies).
How do you con­struct a cash flow state­ment?
The state­ment is divid­ed into four major sections–starting cash, cash in, cash out, and end­ing cash–which should be list­ed on the left side of the doc­u­ment. Across the top of the doc­u­ment, you should list appro­pri­ate time peri­ods (e.g., Jan­u­ary, Feb­ru­ary). A typ­i­cal cash flow for a small com­pa­ny is laid out to cov­er a year. There­fore, you need to be able to esti­mate sales and peri­od­ic inflows of cash, as well as pro­ject­ed out­flows of cash.
You list your start­ing cash bal­ance (as of a par­tic­u­lar date) at the top of the doc­u­ment. Your cash in sec­tion should be sub­di­vid­ed into sec­tions, such as:
Cash sales
Col­lect­ed receiv­ables
Oth­er
Like­wise, your cash out sec­tion should be sub­di­vid­ed into sev­er­al cat­e­gories, such as:
Rent
Pay­roll
Util­i­ties
Office sup­plies
Accounts payable
Debt repay­ment
Oth­er
Obvi­ous­ly, the more spe­cif­ic you can be, the more help­ful the cash flow state­ment will be. At the bot­tom of the cash in sec­tion, include a line for total cash in. At the bot­tom of the cash out sec­tion, include a line for total cash out.
Next, sub­tract your total cash out from your total cash in. If the result is a pos­i­tive num­ber, you have a pos­i­tive cash flow for the month. If the result is a neg­a­tive num­ber, you’ll need to ana­lyze the state­ment to see where you can cut back. The final num­ber on your state­ment will be the end­ing cash. This con­sists of your start­ing cash plus your cash flow fig­ure.
Here is a sam­ple cash flow state­ment:

Cash Flow — Month End­ing March 31, 201X

Start­ing Cash$10,000
Cash In
Cash sales50,000
Col­lect­ed receivables20,000
Other20,000
Total Cash In$90,000
Cash Out
Rent3,000
Payroll15,000
Utilities1,000
Office supplies500
Other40,000
Total Cash Out- 59,500
Change (cash flow)$30,500
End­ing Balance$40,000

How can you ana­lyze a cash flow state­ment to max­i­mize cash flow?
A cash flow state­ment can help you to max­i­mize your cash flow by uncov­er­ing cer­tain cash-relat­ed prob­lems. Because it can also help you to project the amount of cash your busi­ness will have com­ing in and going out on a month­ly basis, it can also help you to deter­mine how much mon­ey you may need to bor­row from a bank or obtain from investors. You can max­i­mize your cash flow by effec­tive­ly man­ag­ing the out­flows and inflows of cash.
Man­age the out­flow of cash
You can decrease the out­flow of cash by cut­ting back on some of your expens­es. For instance, you can move to cheap­er offices to cut back on rent, reduce the hours of your employ­ees to low­er the expense of wages, exam­ine tele­phone bills and office sup­plies care­ful­ly, and cut back on own­ers’ salary with­drawals. In addi­tion, you can con­sid­er leas­ing expen­sive assets instead of pur­chas­ing them out­right.
You can also push for more favor­able cred­it terms with cred­i­tors. For instance, if you cur­rent­ly have to pay your accounts payable in 30 days, you might rene­go­ti­ate so that pay­ments can be made in 60 or 90 days. In gen­er­al, you can min­i­mize your financ­ing costs by accel­er­at­ing your income from cus­tomers while slow­ing your pay­ments to cred­i­tors.
Man­age the inflow of cash
You can increase the inflow of cash by tight­en­ing cred­it poli­cies with your cus­tomers and aggres­sive­ly col­lect­ing receiv­ables. Try giv­ing small cash dis­counts to cus­tomers who pay their bills in a time­ly fash­ion. Also, think about wire-trans­fer pay­ments to speed up receipt of pay­ment. You can also try to keep your inven­to­ry as low as pos­si­ble, seek up-front pay­ments, increase prices, and step up sales efforts.
For fur­ther assis­tance please con­tact your Wealth Advo­cate at Mack­ey Advi­sors.
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