Question

Accountants strongly believe that CASH IS KING. Propose ways for a service company to generate more cash from its operating activities (i.e., without borrowing or selling stock). What can be done?

****Please explain in detail****

Answer 1

Generation of cash from operating activities

Cash flow from operating activities can be generated by managing current assets and current liabilities. Decrease in current assets increases the cash flow due to liquidity and Increase in current liabilities increase the cash flow due to delayed payments

Explanation in detail

Current Assets:

· One of the big current assets held by service companies is accounts receivable. A firm should have good collection policy to ensure its accounts receivable turnover is and cash is generated from sales to customers. A firm should do cost benefit analysis of discount offered vs. cost of capital to ensure early collections of receivables to generate cash from operations.

· Good management of inventories. A service company may have inventories like office supplies. It should ensure the inventories are carried at minimum level without affecting day to day operations. It should order in lower quantities to reduce cash outflow.

· Prepaid expenses should be incurred if it is only necessary like statutory purpose, etc. Else the prepaid expenses should be avoided since it will involve outflow of cash.

Current Liabilities:

· Accounts payable should be managed with more credit period to ensure cash outflow is reduced.

· Credit period should be obtained for day to day operating expenses like payment of rent, utilities, etc so that accrued expenses payable can be increased to reduce cash outflow