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.