To help you overcome any troubes with managing your cash flow, we bring you a three-part series of practical tips for working with cash flow. Here is the introductory part with the first five tips: 

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#1 When planning cash flow, start with income, not expenses 

Although intuition may suggest you to start the cash flow plan with its expenditure side, the ideal procedure, on the other hand, is to first provide the most realistic overview of expected income. Although the inflow of money is usually more difficult to predict than planning a company’s expenses, do start with income. It is necessary to know the options that the collected income is likely to offer you for good cash flow planning. This is how your cash flow plan will allow you to answer questions like: “What amount of expenses is acceptable for the considered income?” 

#2 Plan the cash flow according to the income statement 

Your income statement can be a good basis for the cash flow outlook. But it is important that you consider the differences between the world of accounting and the real world of money. Divide your customers and suppliers according to the agreed invoice due dates. Also consider not only the initial state of cash, but also the amount of receivables from the previous period. Similarly, include short-term payables that will represent payments related to previous period expenses in a given period. In addition to the income statement, do not forget to also add the considered expenses for the purchase of fixed assets and credit repayments to your financial plan. 

#3 Track your payment cycle 

Once you know the time the money has been flowing through the company, you can think more effectively about measures to improve your cash flow. A shorter length of the payment cycle brings additional funds to the company, enabling its development and savings on paid interests when using bank financing of operations. In the longer term, this will also result in an improvement of the economic result. By reducing the time your company waits for money, you can not only speed up the cash flow, but also secure a better market position. 

#4 Monitor your overdue receivables 

The enemy of healthy cash flow is late paying customers. Be proactive. Set up the processes associated with the requirement for timely payment of your receivables. If your business partner does not know for sure that they will hear from you immediately after being late with the payment to you, you can be among the last suppliers that your business partner will pay. Create an in-house schedule of the procedure from the first written reminder, through a telephone notification of the non-paying business partner to a delivery interruption. Determine a contractual penalty for cases of delays from clients with chronically poor payment habits. 

#5 Evaluate stock turnover rate 

Do you wonder what is the optimal stock level that would not tie up too much money and at the same time do not endanger sales or the flow of production? The key is to consider not only the cost-effectiveness of acquiring stock, but also the period of its subsequent “holding” in the company, whether in stock or in the shop. In a comprehensive evaluation of stock efficiency, it is simply necessary to monitor not only the acquisition prices but also whether the purchase of the stock corresponds to the current need for its use in the company. To find out how much stock is lying idle, start measuring stock turnover rate. 

Continued in the near future...

The second part: Tips for working with cash flow #2 
The third part: Tips for working with cash flow #3 

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Article author: Pavlina Vancurova, Ph.D. from  Padia

Ing. Pavlína Vančurová, Ph.D.

In cooperation with Pavlina Vancurova, Ph.D., specialist in business economics from consulting firm PADIA, we have prepared the Caflou cash flow academy for you, the aim of which is to help you expand your knowledge in the field of cash flow management in small and medium-sized companies.

In her practice, Pavlina provides economic advice in the area of financial management and setting up controlling in companies of various fields and sizes. In 2011, she co-founded the consulting company PADIA, where she works as a trainer and interim financial director for a number of clients. She also draws on her experience as the executive director of an international consulting firm. She worked as a university teacher and is the author of a number of professional publications.