The Importance of Cash Flow to Businesses

<h1>The Importance of Cash Flow to Businesses</h1>Author: <a title="Amelie Mag" href="http://www.articlesbase.com/authors/amelie-mag/4439.htm">Amelie Mag</a> In the normal course of business, cash comes in as income and goes out as expense. This flow of receiving and spending cash for commercial purposes is known as the cash flow. Since the core objective of any business is to generate profit, the flow of cash is important as it directly affects the bottomline of the company. 
 
Uses Of Cash Flow 
Cash flow is used: 
to evaluate the liquidity of a company 
to find out ratios like the net present value and the internal rate of return 
to act as a validating input for net income created by accrual accounting methods 
 
Types Of Cash Flow 
Cash flow can be: 
operational cash flow (the flow of cash for normal operation of the business) 
financing cash flow (the flow of cash for financial activities like loans, dividends, stocks, etc.) 
investment cash flow (the flow of cash for investments like plant & machinery, land, and other long term capital expenditures) 
 
Cash flow Constrictions 
Cashflow can become constricted due to the extension of the credit period of your invoices by your customers. The more your sales increase and/or the more the credit period increases, the more constricted your cashflow becomes. The effect of cashflow clogging is seen sharply in operational cash flow. Until the cash from the previous and present sales rolls in, inventory cannot be purchased, orders cannot be executed, and business almost comes to a standstill. 
 
Cash flow Funding 
To solve this most common commercial problem, finance companies offer solutions to provide your business with a steady source of funds that increases in direct proportion with your sales. The finance offered by the finance companies to improve the cash flow is known as cash flow funding, which is typically in the form of account receivables funding or export receivables finance or purchase order finance. 
 
Account Receivables Funding 
Account receivables funding is also known as invoices funding or factoring. Here, approximately 85% of the value of your invoices is paid immediately, with the remaining 15% less the fees of the finance company paid to you when your customer honors your invoice. 
 
Export Receivables Finance 
To expand your overseas business profitably, some finance companies offer to pay almost 80% of your export receivables. The remaining 20% minus the fees of the finance company is paid to you after your overseas buyer pays your receivables. This enhances your cashflow during the work-in-progress and shipping stages. Moreover, the chasing and collection of the receivables may be done by the finance company as they have a multilingual staff, which is extremely well-trained in the laws, customs, and procedures of different countries. 
 
Purchase Order Finance 
Here, funds are provided against your purchase orders. The finance company can directly pay to your suppliers in cash, thereby availing huge cash discounts for your business. It can also provide letters of credit and supplier guarantees. This facilitates the smooth execution of your purchase order.About the Author: Alistair Charles on behalf of Bibby Financial Services. Bibby Financial Services are specialists in improving <a href="http://www.bibbyusa.com/">cash flow</a> through the provision of <a href="http://www.bibbyusa.com/solutions/cash_flow.aspx">cash flow funding</a> solutions to small and medium-sized enterprises.Article Source: <a href="http://www.articlesbase.com/">ArticlesBase.com</a> - <a href="http://www.articlesbase.com/finance-articles/the-importance-of-cash-flow-to-businesses-78711.html" title="The Importance of Cash Flow to Businesses">The Importance of Cash Flow to Businesses</a>

In the normal course of business, cash comes in as income and goes out as expense. This flow of receiving and spending cash for commercial purposes is known as the cash flow. Since the core objective of any business is to generate profit, the flow of cash is important as it directly affects the bottomline of the company.

Uses Of Cash Flow
Cash flow is used:
to evaluate the liquidity of a company
to find out ratios like the net present value and the internal rate of return
to act as a validating input for net income created by accrual accounting methods

Types Of Cash Flow
Cash flow can be:
operational cash flow (the flow of cash for normal operation of the business)
financing cash flow (the flow of cash for financial activities like loans, dividends, stocks, etc.)
investment cash flow (the flow of cash for investments like plant & machinery, land, and other long term capital expenditures)

Cash flow Constrictions
Cashflow can become constricted due to the extension of the credit period of your invoices by your customers. The more your sales increase and/or the more the credit period increases, the more constricted your cashflow becomes. The effect of cashflow clogging is seen sharply in operational cash flow. Until the cash from the previous and present sales rolls in, inventory cannot be purchased, orders cannot be executed, and business almost comes to a standstill.

Cash flow Funding
To solve this most common commercial problem, finance companies offer solutions to provide your business with a steady source of funds that increases in direct proportion with your sales. The finance offered by the finance companies to improve the cash flow is known as cash flow funding, which is typically in the form of account receivables funding or export receivables finance or purchase order finance.

Account Receivables Funding
Account receivables funding is also known as invoices funding or factoring. Here, approximately 85% of the value of your invoices is paid immediately, with the remaining 15% less the fees of the finance company paid to you when your customer honors your invoice.

Export Receivables Finance
To expand your overseas business profitably, some finance companies offer to pay almost 80% of your export receivables. The remaining 20% minus the fees of the finance company is paid to you after your overseas buyer pays your receivables. This enhances your cashflow during the work-in-progress and shipping stages. Moreover, the chasing and collection of the receivables may be done by the finance company as they have a multilingual staff, which is extremely well-trained in the laws, customs, and procedures of different countries.

Purchase Order Finance
Here, funds are provided against your purchase orders. The finance company can directly pay to your suppliers in cash, thereby availing huge cash discounts for your business. It can also provide letters of credit and supplier guarantees. This facilitates the smooth execution of your purchase order.

Alistair Charles on behalf of Bibby Financial Services. Bibby Financial Services are specialists in improving cash flow through the provision of cash flow funding solutions to small and medium-sized enterprises.

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Article Tags: Business, Work, Cash Flow, Cashflow, Funding, Cashflow Funding

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