How to improve operating cash flow
/There are several ways to improve the cash flows generated by the operations of a business. These methods are needed to keep from having to pay for expensive additional funding when cash requirements exceed the amount of cash on hand.
1. Collect Overdue Receivables
Examine accounts receivable to see if there are any overdue invoices. If so, adopt a more aggressive posture in promptly contacting customers and demanding payment. This may include a more rapid shifting of seriously overdue receivables to a collection agency, when more aggressive action appears warranted. When customers are routinely paying later than their agreed-upon credit terms, consider shortening their credit terms or switch them to cash-in-advance or cash-on-delivery terms.
2. Increase Inventory Turnover
Review how quickly the company’s inventory is turning over. When inventory is getting stale, consider returning it to the supplier (probably for a restocking fee), and alter the purchasing algorithm to tighten the purchasing criteria for these items. Also, consider selling off excess inventory items to third parties, even though the prices obtained may be quite low. Another option is to write off obsolete inventory items, which reduces the firm’s taxable income and therefore its income tax liability.
Related AccountingTools Course
3. Pay Suppliers on Time
Ensure that no accounts payable are being paid prior to the payment dates agreed to with suppliers. In addition, consider contacting suppliers to see if they will accept longer payment terms.
4. Raise Prices
Selectively raise prices on the goods and services being sold. This is especially beneficial when the company’s profits are currently quite low on certain items. If customers do not accept the higher prices, then drop the products entirely. Doing so simplifies the company’s product line, making it easier to run the company. This simplification may also make it possible to prune away some excess overhead costs.