Cash Flow Improvement

3 Key excerpts on "Cash Flow Improvement"

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  eBook - PDF

  Principles of Supply Chain Management

  • Richard E. Crandall, William R. Crandall, Charlie C. Chen(Authors)
  • 2014(Publication Date)
  • CRC Press

    (Publisher)

  This provides a $413 thousand increase in cash flow, with another $413 thousand possible if accounts payable are increased to 60 days. The total increase in cash from the changes in accounts receivable, inventory, and accounts payable amounts to $4.032 million. Table 15.2 lists a few of the ways in which the operations function, along with purchasing and accounting, can improve working capital management. Each company must decide what level of working capital is feasible. This example is intended only to show that better management of working capital can result in significant increases in cash flow. A reduction in the amount borrowed from lenders reduces inter-est expense. A reduction in the inventory has many other benefits, such as reductions in obsolescence or damage and reduction of storage space required. TABLE 15.2 Actions to Improve Working Capital Management Cash Flow Element Action by Operations Revenues Fast, on-time, high-quality complete shipments increase revenues. Good sales and operations planning are the key to achieving this. Direct product costs and operating expenses Careful management keeps costs low. Programs such as lean manufacturing and Six Sigma are two current programs to do this. Accounts receivable Correct, complete, on-time, and defect-free shipments. Many suppliers want the complete order before they authorize payment. Inventory Have the needed quantities of the correct item, but no more. This is the never-ending balancing challenge for operations managers. Accounts payable Good supplier relationships can gain discounts and extended terms. Delaying payments does not always work over the long term. Capital investment Careful management of capacity and currency of facilities. Maintaining currency is an essential core competency. Sale of capital assets It does not pay to be too far behind the curve. Careful maintenance and operations increases disposal value.

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  eBook - ePub

  Accounting for the Numberphobic

  A Survival Guide for Small Business Owners

  • Dawn Fotopulos(Author)
  • 2014(Publication Date)
  • AMACOM

    (Publisher)

  CHAPTER 6 Managing Your Cash Flow More Is Better So now you know how to read your Cash Flow Statement and use it to build a cash flow budget. Hopefully you’re convinced that conserving cash is vital to keeping your business alive, and that you need to closely manage the outflow of cash so every expense is serving to keep the business running rather than draining it of precious lifeblood. The heart of cash flow management is the cash cycle. In most businesses, the cash cycle is based on terms of payment (which indicate the date full payment is due as well as under what conditions discounts can be taken) rather than a simple cash sale, and looks like this: 1. A sale is made. 2. The goods are shipped or the services are rendered. 3. As soon as the business has delivered, an invoice goes out with payment terms clearly stated. 4. Once the invoice is paid, the cash is deposited in the business’s account. 5. Operating expenses can now be paid. In a perfect world, this cycle works seamlessly. In the real world, problems can arise at every step. Thus, every step must be managed. A lot of people who run small businesses mistakenly think that the only way to improve cash flow is to influence Step #1 in this cycle: selling more. But as you saw in the last chapter, booking more sales revenue on your Net Income Statement does not automatically put more cash in your bank account. There are a myriad of factors that influence how, when, and if that revenue converts to cash, and all of those factors come into play after Step #1. Credit extension, invoicing policy, payable policy, dealing with customers, and negotiating with suppliers, banks, and internal staff are all management disciplines that have a direct impact on the cash cycle. If these are handled well, a business can achieve optimal cash flow from existing operations. Sustainable cash flow from operations reduces pressure to increase sales or borrow cash from outside sources

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  eBook - ePub

  Financial Accounting

  • Bev Vickerstaff, Parminder Johal(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Closing that gap released more than $350 million in cash, providing money to fortify the mature businesses against the downturn and capital to invest in the promising solar business. The moves were not radical: cracking down on receivables collection, enhancing account payables terms with suppliers and managing inventories better. The key was focusing managers’ attention on careful cash management.

  Many companies have discovered in the downturn that their reliance on free-flowing, cheap capital during good times covered up a host of problems. At one major cosmetics company, high-, medium-, or low-volume accounts were all treated the same, and incentives encouraged orders, not sell-through.

  When business slowed, the cash cycle lengthened, exposing the highly leveraged company to a liquidity squeeze. An analysis of all the inputs determined the company was spending $1.86 for each dollar of sales. Investing more intelligently by focusing on the cost of sell-through promised as much as $800 million in freed-up capital.

  Source:

  Extract from Singh, A. and Sweig, D. ‘Cash is not only king, it’s strategic’. The Economic Times, 23 September 2009 (http://economictimes.indiatimes.com/Opinion/Editorial/Cash-is-not-only-king-its-strategic/articleshow/5044636.cms?curpg=1 )

  Q  Identify at least three ways in which companies in this case study have managed their cash.

  It should be obvious from these articles that while companies may find ways to adjust their bottom-line profit figures, through the creative use of accounting, it is not yet possible for a company to ‘create cash’. The need for a cash flow statement is therefore clear, since profits are not an adequate reflection of the liquid state of a company and profits do not equal cash.

  8.3 Cash versus profit

  The following factors will result in a company’s profit figure being different from its cash figure:

  •	timing differences
  •	depreciation
  •	accounting transactions that bypass the income statement
  •	changes in the working capital requirements.

  Timing differences

  The point at which the cash is paid and/or received is often different from when the cash is shown in the income statement. This difference is a result of the accruals concept (see Chapter 1 ). In the income statement we show the effect of transactions as soon as they have taken place. This means that any income earned or cost incurred is shown in the income statement immediately. However, we do not show the effect of any income earned or cost incurred in the cash flow statement until the cash has actually

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