What is a Cash Flow Statement and how to manage effectively?

Simply put, the cash flow statement is a helpful tool for the management of a business for short-term planning and cash control. It provides your business with the information it needs to satisfy its responsibilities. The cash flow statement helps financial managers estimate future cash flows by using historical data for cash inflows and outflows.

The difference between total current assets and total current revenues is referred to as working capital calculation or net working capital (NWC). The assets are comprised of payments from clients, accounts receivable, inventory, cash etc. and the liabilities constitute of accounts payable, loans etc. The net working capital can be positive if current assets exceed the current liabilities, and it yields a negative value if vice-versa. A working capital ratio is computed by dividing the current assets by current liabilities. If this value is less than one, it is also said to have a negative NWC.

Proper Inventory Management

There is no point in stocking up your inventory with items that do not sell. The logic is simple, you’re spending on something that isn’t bringing in money and it’s taking up space that could be used for items that sell. This depletes your cash flow. After evaluating your inventory for such items, try to sell existing stocks through discounts and not buy more of these items. After freeing up these stocks, purchase more items that have good sales figures.

Cash Flow Estimations

Cash flow forecasts are based on estimations made by evaluating possible future expenses, payment patterns by clients and how accommodating your vendor is. When you make these estimations, you have to account for fluctuations and keep buffers. You need to understand that payments won’t come in the same way always, you can’t expect vendors to be as flexible with payments to be made each time, other unexpected expenses may come up and sales might fluctuate. Cash flow also needs to account for interest and principal payments.

Operating Activities

The cash flow statement indicates the total cash earned from conducting all operational activities of a business and forms the initial part of the cash flow statement. The cash flow statement from operational activities is computed by first recording the net income, then converting the non-cash item to cash items and accounting for working capital. Thus, this statement indicates the total cash a firm earns by performing all the operative activities.

Financing Activities

This part that indicates how cash is utilized to fund the company is the last element of a cash flow statement. This accounts for cash flow pertaining to loans, dividends, stocks etc. Cash flow from financial operations helps understand the financial health of the company and how well the finances are managed.

Manage Payments In A Timely Manner

as soon as possible to clients. You should always have proper documentation of payment terms and conditions, which can help remind them of the repercussions if they don’t pay on time as per the terms. Perhaps you can incentivize clients for timely payments. If you’re dealing with non-cash payments and if you want to sell to a client without good credit, offer high-interest rates. This will ensure that only if they actually have a pressing requirement, they’d make a purchase and would also pay back on time. Monitor your accounts receivable ageing report to track payments past their due dates and follow up to receive payment. Meanwhile, request for extensions in payment terms from vendors.

Negotiating Payment Terms With Vendors

Build good relationships with vendors and request more beneficial payment terms and perks. You can request special discounts for timely payments or request extended payment periods. If you have a good track record of making payments the vendors will accommodate an extension allowing you to make more sales before having to pay the vendor. Special adjustments in payment terms could also be requested if your purchase order is large.