Cash is the beginning and the end of all business activity. It is the bloodstream of every successful enterprise. Liquidity and profitability depend on how fast the ‘bloodstream’ of cash flow streams through the company.
The time it takes to turn invested money back into cash. In this context, the Anglo-Saxons speak of the ‘CASH FLOW CYCLE’ Money tied up in inventories and accounts receivable earns no interest. Management wants to keep the cash flow cycle short.
The cash flow cycle focuses on four items on the balance sheet:
- Cash and cash equivalents
- Accounts receivables, and
- Supplier liabilities
Why is working capital a key indicator?
Working capital is current assets with less cash and cash equivalents and fewer short-term, non-interest-bearing liability.
The higher the working capital, the more secure the liquidity position.
From an analysts perspective, negative working capital may is being viewed positively, as suppliers pre-finance company sales (especially retailers, and online clients)
The reduction in working capital positions accelerates the cash flow cycle by improving liquidity, and profitability
What are the cash flow ratios?
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
FREE CASH FLOW
Capex to depreciation
Capex to sales
So, now we know why to apply cash management.
Cash Management in Covid Times
If you want to generate cash continuously, apply a cash-management system that works.
RapidKnowhow suggests these five actions to succeed:
- Introduce a pass-through Price Formula Model.
- Reduce your total cost of ownership (TCO). The total cost of ownership (TCO) is the purchase price of an asset plus the costs of operation
- Optimize your cash-flow cycle by understanding the operational workflow. It begins with visibility into the operational workflow, from procurement (purchasing) to collections.
- First, improve timelines with your suppliers (increase) and clients (decrease).
- Next, apply cash-flow cycle management to increase the liquidity by turning your assets quickly into cash so that it can meet liabilities as they fall due
- Create and introduce an Electronic- Billing-System to reduce the time to billing and develop Multiple Revenue Streams such as asset sales, usage fees, subscription fees, lending/renting/leasing/, licensing, brokerage fees
Suggested Further Resources
100 IFRS Financial Ratios, Cometis
The Open University, Professional Certificate in Management, Accounting and the PC for Managers, The Open Business School
Götz Hohenstein , Cash Flow Cash Management, GABLER Praxis