Cash Flow- Credit

Cash Flow

Cash flow refers to the movement of money in and out of a business.
A positive cash flow means more money is coming in from sources such as sales or investments than is going out for expenses.
A negative cash flow means more money is going out than coming in.
It’s crucial for businesses to manage their cash flow efficiently to meet their obligations and ensure smooth operations.

Credit

Credit is an arrangement where a business receives a good or service before payment, with the agreement to pay later.
Credit allows businesses to use goods or services immediately but pay for them later, which can help manage cash flow.
However, credit can also lead to debt if not managed properly.

Credit Terms

Credit terms are the conditions under which credit is offered by a business.
This could include the period in which the payment must be completed, any discounts for early payment, and penalties for late payment.
Agreeing to favourable credit terms can improve a firm’s cash flow.

Credit Control

Credit control refers to the strategies employed by businesses to ensure customers pay their invoices within the agreed credit terms.
Effective credit control is vital for maintaining positive cash flow.
Techniques include setting clear payment terms, dispatching timely invoices, and following up on late payments.

Trade Credit

Trade credit is a type of commercial financing where a supplier allows customers to buy goods or services on credit terms.
Trade credit is a useful source of short-term finance.
Relying too heavily on trade credit can risk relationships with suppliers if payments are not made on time.

Remember that mismanagement of credit and cash flow can lead to financial difficulties even in profitable businesses. Therefore, it’s important to balance the benefits of credit with building a strong cash position and maintaining good relationships with suppliers.