It calculates that capturing the value of that enormous sum through improved cash flow management would reduce total net debt by 29%, increase net profit by as much as 6.3% and improve return on capital employed from less than 14% to more than 15%.
Volumes have been written on the subject of cash flow management, but the collective body of work boils down to a few key points. Business owners have to understand their cash flow as the first step towards effectively managing it. Analysis can help identify potential problem areas in a company's cash flow cycle, and preparing a cash flow budget can help predict cash flow needs in the future.
Analysis of the components that affect the timing of cash inflows and outflows generally includes accounts receivable, credit terms and policy, inventory and accounts payable. A typical cash flow budget projects anticipated inflows and outflows on a monthly basis, but the process can be applied to virtually any time frame-daily, weekly, semiannually, annually or longer.
"Six months to a year is about the ideal time frame for many businesses," Grace says. "That minimizes the level of uncertainty in the projections but is forward-looking enough to allow companies to take corrective action if needed."
He adds that companies may need to prepare longer-term models, looking several years into the future, when preparing loan applications.
Farley's company routinely models its cash flow to project its needs a full year out. Farley and his two partners start working with the company controller at the end of the current third quarter to make projections for the next fiscal year.
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