There are four basic principles of cash management whose practical application leads to the correct management of cash flow in a company. These principles are aimed at achieving a balance between positive flows (money inflows) and negative flows (money inflows) in such a way that the company can consciously influence them to obtain the maximum benefit.
The first two principles refer to money inflows and the other two to money outlays.
FIRST PRINCIPLE: "Whenever possible, cash inflows should be increased"
Example:
- Increase sales volume. Increase sales price. Improve sales mix (boosting those with the highest contribution margin) Eliminate discounts.
SECOND PRINCIPLE: "Whenever possible, cash inflows should be accelerated"
Example:
- Increase cash sales Ask customers for advances Reduce credit terms.
THIRD PRINCIPLE: "Whenever possible, money outflows should be reduced"
Example:
- Negotiate better conditions (price reduction) with suppliers) Reduce waste in production and other company activities. Do things right the first time (Decrease the costs of Not Having Quality)
FOURTH PRINCIPLE: "Whenever possible, money outflows should be delayed"
Example:
- Negotiate with suppliers as long as possible. Acquire inventories and other assets as soon as possible when needed
It should be noted that the application of one principle may contradict another, for example: If it is sold only in cash (canceling credit sales) it is possible to accelerate the inflows of money, but there is a risk that the volume of sales will decrease.. As you can see, there is a conflict between the application of the second principle with the first.
In these and similar cases, it is necessary to evaluate not only the direct effect of applying a principle, but also the additional consequences that may affect cash flow.
