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Cash Flow

Cash is often described as the life blood of a business. For a business to function properly it needs sufficient cash to pay it employees, to pay for materials used by the business and to pay for services used by the business.

In an ideal world  the amount of cash coming into the business (cash inflow) should be greater than the cash going out of the business (cash outflows).

 

This would allow a business to build up cash reserves with which to plug cashflow gaps, seek expansion and reassure lenders and investors about the health of the business.

However, income cash inflows and expenditure cash outflows rarely occur together, and invariably the inflows can lag behind the outflows

It is important for any business that cash is managed effectively. If too little time or consideration is given to this the consequences can be painful.

The main cash inflows are:

* payment for goods or services from customers
* receipt of a bank loan
* interest on savings and investments
* shareholder investments
* increased bank overdrafts or loans

The main cash outflows are:

* purchase of stock, raw materials or tools
* wages, rents and daily operating expenses
* purchase of fixed assets - PCs, machinery, office furniture, etc
* loan repayments
* dividend payments
* income tax, corporation tax, VAT and other taxes
* reduced overdraft facilities

Many of the regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed dates. A business must always be in a position to meet these payments.

To improve everyday cashflow a business can:

* ask customers to pay sooner
* chase debts promptly and firmly
* use factoring as a finance facility
* ask for credit terms with suppliers or negotiate extended credit terms.
* order less stock but more often
* lease rather than buy equipment
* improve profitability

 

 

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