Methods of Improving Cash Flow

Methods of Improving Cash Flow

Managing Trade Credit

  • Efficiently, managing trade credit can improve a business’s cash flow. The aim should be to obtain longer credit terms for payables and shorten the credit period for receivables.
  • Companies may negotiate with suppliers to extend their credit terms, delaying outflow and aiding cash flow.
  • Promptly collecting receivables is vital. This may involve offering early payment incentives or implementing stricter payment deadlines.

Inventory Management

  • Businesses should aim to reduce excess inventory, addressing the issues of high holding costs and tied-up capital.
  • Just In Time (JIT) inventory management can be employed to purchase and produce goods only as they’re needed, effectively reducing inventory costs and improving cash flow.
  • Implementing Inventory management systems can help in tracking and controlling inventory levels efficiently thereby improving the cash flow.

Cost Control

  • Strict cost control measures can play a significant part in improving cash flows. Regularly reviewing cost structures for unnecessary expenses is useful.
  • This might include outsourcing, using less expensive materials, or reducing energy usage to cut costs.

Financing and Investment

  • Besides regular operations, a business can improve its cash flow by making smart investment and financing decisions.
  • If necessary, businesses can consider short-term borrowing (such as an overdraft) to cover shortfalls in cash flow.
  • Alternatively, businesses might consider selling off non-core or underperforming assets to generate more cash.

Price and Volume Strategies

  • Businesses can also manipulate price and volume to improve cash flow.
  • One strategy could be to increase prices, though care should be taken not to impact sales volume adversely.
  • Alternatively, a business could focus on increasing sales volume, perhaps by investing in marketing or improving the product range. Although this might initially decrease cash flow due to increased costs, it could lead to improved cash flow in the future.