In simple terms cash flow refers to the “flow
of money coming in and out of your business.” Cash flow excludes non-cash
accounting items like depreciation, provision for taxation and transaction
items like account receivables. A cash flow statement explains the sources from
where money comes from and how this money is utilised.
The following are five important ways to
improve the sources of your cash flow finance:
1. Account
Receivable collection
If you have customers who are not paying your
dues in time, try to find ways to improve your collection efforts. This could
be done by sending your customers reminders of payment due dates or calling
your customer’s mangers to expedite the payment of your dues. You could also
remind them of penalties for late payments. If you do not have a system of
penalties for late payments, you should consider implementing one.
2. Offering
Cash Discounts
You can offer your customers attractive
incentives such as cash discounts for prompt payment. This will help improve
your cash flow position while keeping your customers loyal to you.
3. Vendor
Discounts
Just as you are offering cash discounts to
your customers, you can take the advantage of cash incentives offered by your
supplier. This means that you will have to pay your suppliers earlier but the
amount to be paid will be considerably less. If you do not consider this as a
valid option then you can start negotiations with your supplier to extend your
payment terms. This will give you more time to collect money from your
customers and pay your suppliers.
4. Up
Sales or Cross Sales
It will be more prudent for you to sell your
products to existing customers than it is to unknown customers. This will
certainly be more profitable for you and less expensive to execute than it would
be for new customers. You can inform your existing customers of the products
and services that you are offering for sale. You can explain the benefits of
your premium products or services. This will go a long way in your cash flow
position. Besides, your customers will benefit from the knowledge of your
products and services that they were previously unaware.
5. Using
Credit Cards
Using credit cards is a convenient way of
improving your cash flow position. The main factor here is to use a billing
cycle as well as grace period to delay payments. This method will only work if
you can pay off your balances within the billing period of each cycle. Let us
assume that your billing period begins on the 15th of every month.
Your credit card company will take all your charges from the 15th of
the previous month and the current month. These charges are included to your
bill and a grace period of twenty-five days is for you to make the payment.
During the grace period, interest is not chargeable. This will help you to make
payment on purchase earlier and pay for them later.
The above methods can really make a positive
impact on your cash flow finance and your profits.