Improving Cash Flow

Written by Patricia Tunstall
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Improving cash flow is an all-important goal for managers, for sufficient cash is vital for protection against unforeseen situations. On a more positive note, cash is necessary to enable the company to explore openings in the market that might result in increased sales or profits. Looked at in this context, it is all but impossible to anticipate how much cash a business will need in the coming fiscal year.

On the other hand, the purpose of the financial statement that includes operating, or profit-making, activities, and investing and financing activities, is to give a forthright picture of the overall financial health of the company. A manager can extrapolate from the previous year's statement, and from the accuracy of the current year's budget, to determine a reasonable amount of cash. The amount of available cash is tied directly to cash flow.

Better Cash Flow Management

Improving cash flow is an essential objective for businesses, but cash flow is affected by many financial decisions made by the manager and the board. Capital expenditures can cause a major reduction of cash flow. Found in the investing activities section of the cash flow statement, outlays for "property, plant, and equipment" can consume an inordinate amount of cash flow.

One way to improve cash flow is to lower the amount of capital expenditures. Another is to tighten control of accounts receivable, which is credit extended to customers. Finally, management must balance the need for inventory to spur sales with the need to limit inventory to increase cash flow.


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