If a company grants credit without first determining the creditworthiness of its customers and does not follow up on late payments, it will experience a slower and smaller inflow of cash, as well as unpaid bills.
Fremont, CA: A business's lifeblood is cash, and it must generate enough cash from its operations to cover its expenses while also having enough left over to repay investors and grow the business. While a company's earnings can be manipulated, its cash flow provides insight into its true health.
Improving Cash Management
Even if a company makes a profit by generating more revenue than it spends on expenses, it must manage its cash flow properly to be successful. The cash flow of a company is linked to its operations or business activities, investment activities (such as the purchase or sale of capital equipment), and financing activities (such as raising debt or equity funding or repaying such funding). The cash generated by a company's operations is linked to its core business activities and offers the best opportunities for cash flow management.
Accounts receivable accounts payable, and inventories are examples of areas where better cash management is possible. If a company grants credit without first determining the creditworthiness of its customers and does not follow up on late payments, it will experience a slower and smaller inflow of cash, as well as unpaid bills. That is why it is critical to have a credit policy in place and to follow up on late payments. When it comes to accounts payable, however, it is a better cash management strategy to pay suppliers later rather than earlier. Furthermore, it is critical not to have too much cash locked up in inventories but rather to have only enough inventories on hand to meet the business's immediate needs.
