When managing corporate finance, cash is a key factor. Not having a good liquidity cushion can lead to problems that end up causing a suspension of payments. Not surprisingly, the daily life of any business depends directly on its liquid assets, the flow of payments made to suppliers and other individuals and institutions with which it interacts, and receipts you get from your customers.
In this regard, the cash flow is a concept that becomes very important because it determines the ability of any company to generate sufficient liquidity to continue its activity. But, what exactly and how a company can optimize it?
The cash flow, also known as cash flow is a financial concept that refers to the flow of cash inflows and outflows of a company experienced in a given period. When we use the cash flow, we talk about a concept related to the treasury of a company, which measures cash resources generated by it at any given time.
Cash flow is calculated, therefore, as the difference between receipts and payments .However, in most cases we find this magnitude related to the concept of benefit. Thus, the cash flow can be calculated as the profit made by a company, to which is added the amortizations and provisions. Mathematically:
“Cash Flow = Profit + Depreciation + Provisions”
In this case, since repayments are an expense, but not a cash outflow, include them in the equation for calculating this magnitude. The same goes for supplies.
Through cash flow seeks to calculate the financial resources of the company in order to identify needs and determine whether it is able to generate sufficient cash to meet its payment obligations in the short term. Poor cash flow management can be the cause of problems that end up in bankruptcy when a company does not have enough cash to pay the bills.
The principles of good management of cash flow are very simple. All of them are based on ensure that the money coming in is more than the money going out and continuous monitoring of our cash requirements.
The first of the principles that a good strategy of optimizing our cash flow is based is trying to collect as soon as possible, ahead of the period of deferment of payments to our customers as possible. In order to bill earlier and more frequently it is important to manage the rotation of our receivables through a software billing bills classified according to their seniority.
The availability of cash is not just a matter of collections, but also payments. Just as important it is to charge soon as late payment. In this way, we will have a free line of credit without incurring the cost of going to bank financing for liquidity. To achieve this, it is important to negotiate better terms with suppliers.
Although it is convenient to defer payments as much as possible, it is always interesting to use discounts offered by suppliers for prepayment. For example, 2% over a 30-day bill could amount to a gain of 24% per year if the money was invested.
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Invoice discounting has become an ideal place to regulate cash flow mechanism. It is basically a type of financing offered by banks through which a third party buys our bills and provides the cash in advance, discounting an interest of this amount. This is a type of financing which, in many cases, it is cheaper than traditional loans, and we might offer up to 90% of the total amount of our invoices.
There are many financial institutions that offer factoring services, which the company gives them their bills for discount.
There is no doubt that investment in productive capital and equipment is essential to ensure the growth of any company. However, we must not forget that these investments involve immobilizing a lot of economic resources that could be used to the daily activities of the company. By leasing this equipment, we will increase our liquidity and dotards more resources to our treasury. To do this, we can use formulas such as renting, leasing or lease-back.
It seems patently obvious, but not always put into practice. When preserve our cash flow, we must refine thoroughly. It is interesting to draw up a budget to know what items are used all the resources of our company in order to avoid unnecessary or unproductive expenses, such as those that are very nice in the office but they do not help plants grow our business.
It is essential not ask for more than we need. It is therefore important to anticipate our demand, figuring out which products sell best and ensuring that funds are not immobilizing products which are difficult to sell. In any case, a quick cash injection can pass unliquidated old or obsolete stocks at cheaper prices.
Managing cash flow has become a must to take our company forward variable, but often depends on factors other than our management. Our suppliers and customers have similar financial needs and therefore also need to optimize their cash flows.
In fact, 70% of small companies experienced overdue payments in 2013, and many suppliers change their terms and conditions unilaterally and without notice. There are many factors that make it increasingly difficult management and optimization of cash flow, often for subjective reasons such as quality of work done.