Cash Flow Management

Every business needs one thing the most: cash. Knowing how to measure and manage it, is one of the most critical aspects of running a successful enterprise.

The Income Statement is a great tool for managers and owners to see profits, sales growth and expenses, but cash availability and how your company is using it can only be seen on the Balance Sheet and Cash Flow Statements. Understanding these reports will make you understand your cash flow problems. Spending too much on new inventory or not receiving payments from customers fast enough? Knowing your financial health will help you face chalanges in the future well prepared.

There are many steps that one can take to avoid cash flow problems. Consistent growth is one of them. Every investment or purchase should be accounted for separately, with a scheduled return and assigned separate costs for each one. Do not use profits from one customer to fund for losses from another.

For a deeper analisys, some of the following tests can be used:
Quick Ratio – short term cash to short term debt (Cash + AR / Current Liabilities). Value between 0.5 and 1 is good.
Days Outstanding – how long it takes to collect a payment from a customer (AR / Annual Sales x 365). The shorter the better.

If it all sounds to complicated, make sure to discuss with your accountsnt to keep your cash growing.


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