Successful, profitable businesses know that vital to their success is proper cashflow management. North Star Tax and Accounting has helped many businesses develop plans, strategies, and solutions to manage cash flow effectively. Depending on your specific business, cashflow can be difficult to manage effectively.
To properly deal with a companies cash flow there are a few things that need to be analyzed.
Cash Flow Cycle
Cash flow cycle refers to the time it takes to purchase or manufacture a product, sell the product, and collect payment for that product. A quicker cash flow cycle allows you to generate more profits. An example would be a car dealership. If it takes a dealership one month for a cash flow cycle to occur than they complete 12 total cycles per year. If they make $5,000 on each cash flow cycle they are able to generate $60,000 for the year.
If however they are able to buy a car, sell it, and collect their money 2 times per month, even if they make less per vehicle such as $4,000, they are able to have 24 cycles at $4,000 each making them $96,000 instead of the $60,000 in the previous example.
This shows that the rate at which a company is able to run through the cash flow cycle affects profits more than even the profits per product. Stagnant inventory is a killer for businesses cash flow.
The time it takes for a company to collect payment for a good or service sold can have a major impact on a business. We will use another example to illustrate this point.
A computer sales company has a computer for sale. It costs $1,500 to buy if the customer pays for it all up front. If the customer pays for it over the 90 day 0 percent interest that same computer costs $1,600 to buy. The reason the price goes up on the computer in the second example is because of the time delay in getting paid. The computer company is unable to buy another computer to sell due to their cash flow being tied up in a computer that is being paid off over 90 days.
The example I used is of a company that already understands how collecting payment will affect their cash flow. Imagine a company that charges $1,500 for a computer whether you pay up front or over 90 days. The loss in revenue and profits from not recognizing how cash flow is affected by payment collection can be very large.
North Star Tax and Accounting can help your company determine how best to collect payment, reduce cash flow cycles, and manage inventory.