5 Steps to Improve Cash Flow for Cash Deficit Companies


Read this ebook to understand the difference between cash surplus and cash deficit companies and learn the ways cash deficit companies can optimize their cash flows.

Contents

Chapter 01

Cash Surplus vs Cash Deficit Companies

Chapter 02

5 Steps to Improve Cash Flow
Chapter 01

Cash Surplus vs Cash Deficit Companies


Companies can be classified into two types based on their cash position:

  • Cash surplus companies/ Net investors
  • Cash deficit companies/ Net debtors

Based on cash position and financial situation, the drivers influencing the purpose, accuracy, and frequency of cash forecasting vary.

Learn the key differences between the two types of companies in detail:

Cash Surplus vs Cash Deficit Companies

Cash Surplus Company

Cash Deficit Company

Definition

Companies with cash in excess of what is required for running day-to-day operations
Companies suffering from a cash crunch to meet their working capital obligations

During Crisis

Cash surplus companies have their businesses booming
Cash deficit companies are struggling to make their ends meet

Cash Situation

Plenty of cash reserves
Utilized most of the revolvers

Cash Forecasting Driver

Business expansions, investments, and M&A
Tightly manage cash, and identify and mitigate risks

Degree of Accuracy and Frequency

Forecast with reasonable accuracy and frequency
Forecast with high accuracy and frequency
Chapter 02

5 Steps to Improve Cash Flow


The key steps to make effective decisions during a cash deficit situation are as follows:

Extend payables:

Cash deficit companies must find creative ways to extend payables, especially when their A/R is less than A/P.
Ways to extend accounts payable are:

  • Optimize vendor selection process by negotiating buying terms to longer payment terms or find opportunities for better pricing.
  • Build great relationships with the suppliers and be consistent with disbursements.
  • Document the payment terms which can be used in the future, and include all service level agreements.
  • Approach vendors personally for paying them at a later date, based on rapport.

Track balance in the revolver:

A revolving type of credit is a useful facility for businesses experiencing sharp fluctuations in cash flow and some unexpected large expenses. But, cash deficit firms might overdraw from their credit facility due to irregular tracking of the balance left in the revolver.
The balance can be tracked in the following ways:

  • Track available amounts on their credit facility regularly.
  • Available credit refers to the amount left to spend by the borrower. The amount is calculated using the formula:
    Total credit limit – Borrower’s purchases (along with the interest on them)
  • Make use of a debt module to track whenever an amount is drawn from the revolver.
  • Create short-term forecasts to learn in advance about how much amount needs to be borrowed through the revolver. This helps prevent overborrowing.

Cut superfluous expenses:

Review the line items to identify areas to trim costs that deplete savings. Thus a cash deficit organization must explore new ways for cutting costs tactically to liberate from negative cash flow.
This can be done in the following ways:

  • Record costs by breaking them into fixed costs and variable costs, and prioritize necessities for spending.
  • Keep a track of tax-write offs.
  • Let technology take care of menial and repetitive tasks so that employees can focus on high-value tasks.
  • Outsource bookkeeping processes for swift and error-free auditing.

Create an emergency budget:

Emergency funds help fund basic financial needs during hardships like pandemics, recession, etc.
The necessary steps to plan an emergency budget are:

  • Review your regular budget, cut unnecessary expenses, save money whenever possible, and take advantage of the busy seasons.
  • Create long-term forecasts to run scenario analysis to identify peak seasons and risk horizons and their impact on the cash flow.

Negotiating better payment terms with customers:

It is crucial to negotiate early payment terms to collect A/R early from the customers.
This can be done in the following ways:

  • Offer discounts for early payments.
  • Keep the invoices handy and follow up with customers personally or through automated reminders as the due date approaches.
  • Include penalties for late payments.
Chapter 01

Cash Surplus vs Cash Deficit Companies


Companies can be classified into two types based on their cash position:

  • Cash surplus companies/ Net investors
  • Cash deficit companies/ Net debtors

Based on cash position and financial situation, the drivers influencing the purpose, accuracy, and frequency of cash forecasting vary.

Learn the key differences between the two types of companies in detail:

Cash Surplus vs Cash Deficit Companies

Cash Surplus Company

Cash Deficit Company

Definition

Companies with cash in excess of what is required for running day-to-day operations
Companies suffering from a cash crunch to meet their working capital obligations

During Crisis

Cash surplus companies have their businesses booming
Cash deficit companies are struggling to make their ends meet

Cash Situation

Plenty of cash reserves
Utilized most of the revolvers

Cash Forecasting Driver

Business expansions, investments, and M&A
Tightly manage cash, and identify and mitigate risks

Degree of Accuracy and Frequency

Forecast with reasonable accuracy and frequency
Forecast with high accuracy and frequency

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