Keys to increase cash flow – get balance in business cycle
Keys to increase cash flow
Cash flow attribute to the cash that comes in and goes out in a given period. So, follow these keys to increase the cash flow in your company. Inappropriate handling of this will affect your liquidity. It will merely default on payments, ultimately generating a loss of credibility and trust between your suppliers and the financial system.
Identify the business cycle is the key to increase cash flow
Entrepreneurs must establish what the actual expenses are and when the real business income generates. According to Juan David Montoya Posada, Manager of Commercial Strategy of Grupo Bancolombia, “on many occasions companies generate a significant income, but when we review financial management, we can find a deficit in the balance due to an inappropriate business cycle.”
Here is the following hypothetical case of a company that makes garments. To carry out its work, it must import raw material from India, which implies advance transfers. Otherwise, the supplier will not dispatch the merchandise.
Emilio Cardona, an expert in finance and professor at the Universidad de Los Andes, recommends being attentive to the time the company takes to collect invoices from its clients. That is, portfolio turnover, because “it impacts the income or investment of working capital, then by improving portfolio turnover, less is being invested in working capital.” So, proper collection management is essential to optimize the flow of the company.
Another typical example is educational institutions, where the hiring cycles of personnel adjust to the processes in which they pay money for tuition. In this way, students who pay their education and pensions for ten months finance the institution’s salaries and operations during that period—the teachers’ sign contracts for ten or eleven months.
Montoya Posada also points out that it is essential to discard income that does not imply liquidity from the cash flow, as is the case of valuations (in revenue) or depreciation (in expenses) and records only transactions involve a movement in bank or cash accounts.
Adjust costs and expenses to the reality of the company
Analyze the company’s cost structure to adjust it to the income produced. Implement actions that optimize the generation of liquidity, that is, cash to cover short-term obligations.
It is essential to be attentive to expenses that do not contribute to the organization. Underutilized equipment that, although considered an investment, also represents a cash flow no longer generated.
According to the consultant Norman Velásquez, a senior management specialist, categories must be established for cash inflows and outflows, “because in this way it will be clear which activities or products give more profitability and which ones generate more expenses. Moreover, it will be possible to cut expenses more easily when there are moments of crisis,” he explained.
For his part, Cardona says that entrepreneurs must set the objective of increasing income and controlling or reducing costs, expenses, and investment levels. It ensures that the operation generates benefits that leverage the company’s growth in the medium term and ensure its sustainability.
Have updated and reliable financial statements
The basis of the cash flow is the financial statements of the company. Therefore, they must be kept correctly and are up to date. Otherwise, they will not serve much for the construction of the flow. It is common for SMEs to review financial reports two or three months behind. But this practice is inappropriate because it does not allow forecasting cash needs in the short and medium-term.
Likewise, the billing amounts and the payment terms granted must be verified. Taking into account the taxes generated in each operation and the dates you send it to the local and national tax authorities.
In this exercise, the accountant is a fundamental ally. Therefore, it is necessary to involve him in the entire task. Especially when considering the financing costs derived from taking credits or factoring operations (portfolio negotiation). It is also convenient to work on the year’s planning to establish those periods in which purchases, investments, or extraordinary expenses will be made.
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