by Infoshelter

Created on: October 30, 2010   Last Updated: January 18, 2011

First of all, we have to define what kind of objectives is pertinent to a healthy business cash flow.

Meeting deadlines in terms of dividends due to shareholders, wages and salaries to employees, invoices to suppliers and payback installments to creditors, is the core objective of a successful cash flow management. Therefore, punctuality in payments to various individuals, groups or organizations, which are associated to the company’s business operations, is the primary objective to be met by the company’s financial managers who are responsible for cash flow issues. How could this be implemented, though?

Keeping an optimum balance between the company’s fixed assets, not directly transformed into cash and therefore not flexible in terms of meeting payment deadlines and, cash reserves, readily available for the company’s routine and urgent cash needs, is the cornerstone of an effective cash flow management policy.

It is a wise habit to invest any cash earned in the form of business profits as soon as it is realized, so that it is not spent, however, provision should be made for any immediate and regular cash requirements, caused by the company’s day-to-day operation. There are plenty of examples of vast corporations which could not meet routine cash payments, because they had invested excessively in fixed assets. The result was for those companies to face financial difficulties or even come close to the verge of closing down, because of their inability to meet successfully and in a timely fashion any payments due to third parties, despite their vast size and long-standing prestige. So keeping the optimum amount of readily available cash is very important.

Secondly, special care should be applied in the claim of the amounts of cash owed to the company by its various buyers and debtors. The key principle in this case is that, it is better for money to be kept in the company’s bank account, rather than in the bank accounts of its credit buyers and debtors.

The role of cash flow for a company is similar to the role that blood plays in the human body: its circulation and availability must be steady and continuous; otherwise the required quantities of oxygen won’t be able to reach different organs and regions of the body, whenever it is deemed necessary.

Plainly expressed, debt hunting should never be considered as a mundane and insignificant task, because this is where the company gains its valuable and hard earned cash. Besides, if there is not any pressure applied to debtors, they might be given the impression that they can pay whenever they feel like and if this situation deteriorates to a great degree, then it is mathematically proved that it will cripple the company.

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