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Wise Cash Flow Techniques for Efficient Business Management

Cash Flow Techniques

Cash-Flow is the Backbone of every financial System. It is a Survival -Nectar for every organization to be fittest in the industry.

Cash -Flow has various types and maintaining it properly is an art as well as science at the same time. In a simple word, Cash Flow Management is a Tool which can serve various purposes from maintaining day to day business operations up to analyzing concerned company’s financial health.

Contents

  • What is Cash Flow?
  • What are the types Cash Flow?
  • What is Free Cash Flow?
  • What are the major benefits of Cash Flow statement?
  • Cash Flow Analysis – Major Ratios to consider
  • What are the Efficient Techniques of maintaining Cash Flows?

What is Cash Flow?

The Cash-Flow can be defined as Inflow and Outflow of cash for certain Business, Institution or Individual in a specific stipulated time limit. Many misunderstand the concept with Income. But it is different as, the income is on Accrual Basis means its like a matching the expenses when they occurred whereas Cash flow is based on Actual receipt Basis.  So, many entities’ Income statement may vary from its Cash-Flow statement.

What are the types Cash Flow?

Operating Cash-Flow

Operating cash flow is the inflow and outflow of the cash generated by performing day to day business activities such as purchase and sales of products. Purchase of inventory, rent payments, Interest received, Interest paid on loans, payment of wages are some factors which majorly contributes to the Operating Cash flow.

Cash Flow from Investments or Investing Cash Flow

It is the cash flow earned from various investments by transactions such as buying and selling of investments. For Example: Company A bought 100 shares of company B and sold it at higher rate. The margin of profit earned in cash will be the Cash flow from investments. Collections of outstanding loans, sale or purchase of fixed assets, Insurance settlement amount, acquisition or sale of business are some main contributors to the Investing Cash flow.

Financing Cash Flow

It is the cash flow generated from performing financing activities. It is the amount generated from movement of cash between the company owners, creditors and investors. For instance: repayment of capital.  Dividend payment, Buyback of Equity or Cash gain from issuance of bonds, shares or other securities are the major influencing factors of Financing Cash Flow.

What is Free Cash Flow?

Free cash flow is the excess amount of operating cash flow over the capital expenditure. It is calculated separately than the cash flow statement. It serves as one of the major measures to evaluate the company value as well as Liquidity for investors.

Formula of Free Cash Flow: Net Income + Non-Cash Charges +Interest (1-tax)-Capital Expenditures-working Capital Expenditure

What are the major benefits of Cash Flow statement?

  • For maintaining day to day operating expenses such as wages, electricity expenses, bills and others.
  • For introspecting economic condition of the business
  • For confirming financial stability of the business
  • For serving as a measure of credit worthiness for loan or capital raising purpose.
  • As a measure of liquidity, from investor’s point of view
  • As a measure of evaluating in financial research from the point of view of financial institutions or willing investors and bank.
  • For maintaining day to day operating expenses such as wages, electricity expenses, bills and others.
  • For introspecting economic condition of the business
  • For confirming financial stability of the business
  • For serving as a measure of credit worthiness for loan or capital raising purpose.
  • As a measure of liquidity, from investor’s point of view
  • As a measure of evaluating in financial research from the point of view of financial institutions or willing investors and bank.

Cash Flow Analysis – Major Ratios to consider

A cash flow analysis is a tool for checking up on firm’s financial health. It is the study of the movement of cash through your business, also called a cash budget, to determine patterns of how you take in and pay out money.

For Cash flow analysis, look at the last two years of the firm’s balance sheets and compare the differences between the two in order to develop the statement of cash flows.

From an income statement, such as profit or loss account, as well as the information from the comparative balance sheets, particularly how current assets and liabilities may have changed, you can develop your statement of cash flows.

Some of the useful ratios to look at are as below:

  1. Current Ratio: The current ratio is a liquidity ratio that measures a company’s ability to pay its short-term liabilities including those due within one year. To calculate the ratio, divide company’s current assets to its current liabilities. Ideal ratio is 2:1
  2. Operating Cash Flow Ratio: This ratio shows how many rupees of cash you get for every rupees of sales. The higher the percentage indicates more profitable your business is. It is calculated by dividing cashflow from operations (CFO) / Sales.
  3. Cash Generating Power Ratio: It shows the company’s ability to generate cash from operations only, compared to the total cash inflow. It is calculated as, Cash from operating activities (CFO) / (CFO + Cash from investing activities + Cash from financing inflows).
  4. Current Liability Coverage Ratio: This ratio is used to analyze the short-term stability of a company. This ratio also includes the current maturing portion of long-term debt. It shows the company’s debt management practices. It is calculated by dividing CFO by Current Liabilities.
  5. Cash Flow per share (CFPS): CFPS is calculated by dividing cash flow from operating activities by number of shares outstanding. It gives more clarity on liquidity of the business.

What are the Efficient Techniques of maintaining Cash Flows?

Managing cash flow is like having the perfect baseball swing: it’s all about timing.”

Reduce unwarranted Inventory

Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. They tie up a lot of cash and could hurt your cash flow. Carefully consider which products sell well and which you have a hard time turning over.

Opt for Leasing instead of buying

By leasing, you pay in small increments, which helps improve cash flow. An added bonus is that lease payments are a business expense, and thereby can be written off on your taxes and also by leasing vehicles, computers and other business equipment, you get access to the latest features and avoid tying up cash.

Optimize Working Capital Cycle

Carefully planning the short term needs in terms of working capital requirement, is the best solution to optimise cash & liquidity position. For instance, let’s say the creditors are settled on 30 days credit period whereas we receive payments from customers in one week’s time. So, this means we have net period of extra 20 days to churn the working capital. How this position is optimised to use the available funds for next 20 days, is again a matter of planning will vary from one entity to another.

Consider Invoice Factoring

Invoicing factoring is the process of selling your unpaid invoices to a company in exchange for immediate cash. The factoring company takes a small cut of the money you earn, but the payoff is that you aren’t stuck waiting on customers.

Expediating Payment Process

Giving discount on early payments, up front part payment before job completions are some methods of getting payment early. It will lessen the gap and the amount can be utilized for the short-term income needs till the creditors’ payment cycle.

There are many beneficial government schemes also to encourage the startup businesses or MSMEs. To know more about them in our next article… stay tuned with us.

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