Cash Flow Management

Firms require cash to pay obligations as they fall due (employee salaries, stock purchases, electricity bills). 

The management of credit sales (Accounts Receivable) is critical. 

Poor management of cash resources will result in poor liquidity; cash is the life blood of a firm (see Cash Flow Statement).

Distribution of Payments:

To maintain cash resources, firms should avoid making large payments at one particular period of time. Making substantial cash payments increases the firm’s risk of liquidity issues. Distributing these payments over a longer time period (monthly / weekly payment of smaller amounts) will stabilise the cash balance of the firm.

Cash flow statements highlight particular periods of cash shortfalls and surpluses throughout the year, enabling a firm to anticipate and respond.

Discounts for Early Payment:

Offering your creditors (Accounts Receivable) the opportunity to receive a discount if they pay early. Usual credit terms are 30 days. Offering an incentive to pay before then increase firm cash stores (liquidity) and reduces costs to the customer.

This strategy has a negative impact on profitability (less revenue obtained) but can be useful in achieving the financial objective of liquidity. Best idea to target larger customers to have greatest impact.

Factoring:

The sale of Accounts Receivable to an external firm to receive an instant injection of cash, at a discounted overall value ($35,000 cash for $40,000 of Acc Rec). This strategy impacts firm profitability (reduced revenue) but can be a last resort for a firm struggling with cash flow issues.