Let’s look at each flow of cash:
Inflows: Inflows are the movement of money into your cash flow. Inflows most likely come from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customer’s account. The proceeds from a bank loan, money received from investors or sale of assets are also cash inflows.
Outflows: Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses. If your business involves reselling goods, then your largest outflow is most likely the purchase of inventory. A manufacturing company’s largest outflows are usually the purchases of raw materials and other components needed for the production of their final product. Purchasing fixed assets, paying down debt and reducing accounts payable are also cash outflows.
Accounts Receivable and Cash flow Accounts: Receivable represents sales that have not yet been collected as cash. You sell your merchandise or services in exchange for a customer’s promise to pay you at a certain time in the future. If your business normally extends credit to your customers, then the payment of accounts receivable is likely the single most important source of cash inflow.
In the worst case scenario, unpaid accounts receivables will leave your business without the necessary cash to pay its own bills. More commonly, late or slow-paying customers will create cash shortages, leaving your business without the cash necessary to cover its own cash outflow obligations.
Knowing your Receivable Turnover Ratio (RTR) can provide great insight into your account receivable position. You calculate ratio by dividing annual sales by the total dollars of outstanding receivables. To break this metric down into days, just divide your RTR by 365 to give you the average number of days it takes for you to collect on outstanding receivables.
In addition, you should print a weekly accounts receivable aging schedule and ensure frequent and appropriate contact is made to collect the money owed to you.
