A Project Is Expected To Produce Cash Flows Of How To Create A More Positive Cash Flow

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How To Create A More Positive Cash Flow

If, as many experts agree, the golden rule of business is “cash is king,” then the joy of business is positive cash flow. Cash flow is the flow in and out of your business over a period of time (weekly, monthly or quarterly). If the amount of cash coming into your business exceeds the amount of cash going out of your business, your company has a positive cash flow. However, if your cash flow is greater than your cash flow, your company’s cash flow is negative. To generate positive cash flow, generate more cash and collect cash more timely and at the same time, maintain or reduce your expenses.

Positive cash flow doesn’t happen by accident; This happens because a well-defined financial management technique called “Cash Management” is employed. A good cash management system helps in managing cash generating activities efficiently and effectively. The most important thing is to maintain an optimal level of cash with no excess or shortage. Maximizing cash flow wherever possible is a mandatory practice. Two activities that accelerate cash flow include invoicing customers as quickly as possible and collecting cash on past due accounts. Delaying cash payments until they are due is an important step in good cash management. Negotiating extended payment terms with suppliers delays cash outflows. Additionally, investing extra cash to get a higher rate of return is a good business practice.

In order to understand the quantity and timing of cash flows, it is important to plot cash movements using cash flow forecasting. A cash flow forecast provides you with a clear picture of your cash sources and the expected date of their arrival. Identifying these two factors will help you determine “what” you will spend the cash on and “when” you will need to spend it.

Your financial reporting documents should include an income statement, balance sheet, and cash flow statement. Your “cash flow forecast” reflects the same three types of cash flow activities that appear in your statement of cash flows. There are three types of cash flow activities:

o Cash Flow from Operating Activities: This is the generated cash flow that is a direct result of the sale of your products/services.

o Cash flow from investing activities: This is cash flow generated from non-operating activities, such as, investments in plant and equipment or other fixed assets.

o Cash flow from financing activities: This is the cash flow that is generated from external sources—lenders and investors.

These three types of cash flow activities are interrelated. They depend on each other and affect each other. A cash flow forecast should take this into account and provide a complete picture of where cash will come from and how it will be used over the forecast period. The relationship between different cash flow activities may depend on the nature of your business, the stage of development of your business, as well as, general economic conditions or conditions in the market or industry in which your business operates.

Cash outflows and inflows rarely coincide. In many cases, cash inflows seem to lag behind cash outflows, leaving your business cash-strapped. This shortfall is your “cash flow gap”. The cash flow gap is the time (number of days) between paying your business for goods and services purchased and receiving cash from your customers for goods or services sold. In other words, inventory days + receivables collection period – accounts payable period = cash flow gap. This gap, the cash flow gap, must be financed. Keep in mind the fact that, for every day your cash flow gap is compounded, interest is also accrued. Even when interest rates are low, financing costs can rise quickly.

Here are three ways your company can close the cash flow gap:

1. Extend your payment terms for purchases for inventory. In most industries, payment terms are largely determined by tradition and vary by industry.

2. Reduce collection period. The faster your company can collect money for products and/or services sold, the shorter the cash flow gap will be.

3. Increase inventory turnover. The faster your company moves inventory, the less cash it needs. The key to successfully managing inventory is to constantly monitor your day-to-day sales activities.

Profit growth does not necessarily mean more cash on hand. Profit (or net income) is the difference between your company’s total revenue and total expenses. It measures how efficiently your business runs. Cash flow measures your company’s liquidity (ability to pay bills and other financial obligations on time). You can’t spend profits; You can only spend cash to pay suppliers, employees, government and lenders.

Many small business owners have discovered that profitability does not guarantee liquidity. Over time, your company’s profits will mean little if they are not accompanied by positive net cash flow. To create positive net cash flow, generate more cash and collect cash more timely while, at the same time, maintaining or reducing your expenses. Here are four ways to help your company generate more cash:

1. Increase sales by attracting new customers. Your business cannot survive without adding new customers. New customer acquisition is a process that combines market data with direct marketing tools to identify and reach high-potential prospects and convert those prospects into customers.

2. Increase sales by selling additional products/services to existing customers. Generating additional business from your existing customer base is much less expensive than generating new business from new customers. A regular review of your customers’ purchase history and purchase frequency can reveal some interesting facts about your customers’ shopping habits.

3. Generate more cash from every dollar of sales. Increasing the profit margin by increasing the selling price and decreasing the cost of goods sold results in more cash.

4. Reduce overhead. Overhead costs generally include facilities, equipment, administrative and management personnel. The key is to generate a large volume of business at a low cost.

Ideally, over the course of your business cycle, the money coming into your business should exceed the money going out. Building additional cash balances is important because it enables you to cover cash flow gaps when needed, pursue expansion initiatives, and reassure lenders and investors that your business is in good financial shape.

Copyright © 2008 Terry H. Hill

You may reprint this article in your newspaper, magazine or on your website for free, provided the article is unedited and with each article copyright, author bio and contact information appears below. Articles appearing on the web must provide a hyperlink to the author’s website.

Author, speaker and consultant, Terry H. Hill is CEO of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida. is the founder and managing partner of An experienced CEO, Terry works directly with business owners of privately held companies on the issues and challenges they face at every stage of their business life cycle. Contact Terry by email at http://www.legacyai.com or call him at 941-556-1299.

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