Question

6. Mention to the board three activities that can increase cash of the company and two activities that can decrease cash of the company.

Answer 1

Activities that increase the cash :

1) Cut stocks

Reduce the amount of cash tied up by buying and holding raw materials or goods for resale. This can be done by (a) ordering less stock from suppliers and/or (b) offering discounts on stocks held to encourage customers to buy (ideally for cash).

2) Reduce the credit period offered to customers

This is easier said than done.By asking customers to pay for their purchases quicker, a business can accelerate cash inflows. However, there is no guarantee that customers will agree. They may need to be given a financial incentive , such as a prompt payment discount.

3) Cut costs

By far the most important method of improving cash flow.Every business can identify savings in non essential costs if it looks hard enough. The recent credit crunch and recession has proven that businesses can take drastic actions to cut overheads and other costs, which immediately reduces cash outflows.

Activities that decreases cash flow:

1) Lower Inventort turnover

Inventory turnover is calculated by finding the ratio or sales in a period to inventories at the end of the period. Lower inventory turnover usually indicates less effective inventory management.Poor inventory management expands the level of inventories on the balance sheet at any given time,meaning inventory is not being sold. This is a use of cash that decreases cash flow.

2) Decline in Days Payable Outstanding

Days payable Outstanding measures how quickly a business pays its suppliers. It is calculated by multiplying days in the period by the ratio of accounts payable to cost of revenues in a period. When days payable Outstanding declines, the time it takes for a company to settle up with its suppliers declined,meaning it is paying its suppliers faster,meaning money out the door sooner.This reduces accounts payable on the balance sheet.Reducing current liabilities is use of cash and this decreases cash flows.