Cash flow accounting is a common activity in companies. Accountants often watch a company's cash balance closely to ensure the business can pay necessary expenses to remain operational. Four different areas are available to reduce cash outflows. While other cash reduction areas are possible, these four areas often apply to most businesses.
Cash flow accounting is a common activity in companies. Accountants often watch a company’s cash balance closely to ensure the business can pay necessary expenses to remain operational. Four different areas are available to reduce cash outflows. While other cash reduction areas are possible, these four areas often apply to most businesses.
Reduce Inventory Costs
Inventory costs are common for retailers or manufacturing companies. Purchasing new inventory to sell or produce goods is unavoidable. Companies can, however, look for cheaper options when restocking inventory. Reducing inventory costs ultimately lowers the company’s cost of goods sold. Lower cost of goods sold improves the company’s gross profit, which helps pay for the company’s operational expenses.
Lower Operational Expenses
Operational expenses include wages, utilities, rent, depreciation or office supplies, among other expenses. Accountants can review these expenses and make recommendations for decreasing the cash flows associated with the expenditures. In some cases, unnecessary expenses like meals for employees may be completely avoidable. Companies can lower expenses by finding alternate vendors or reducing the use of the item in the business.
Avoid Asset Purchases
Long-term assets such as property, plant or equipment help a company produce goods or run the business. Needlessly purchasing these items, however, can create a quick drag on cash resources. Companies should avoid purchasing new assets that do not add value to the company. Additionally, the company should avoid purchasing replacement assets. Using older assets until they can no longer provide value will save the company cash.
Use Equity Financing
Many companies use external financing to help pay for their operations. Debt financing results in interest payments for borrowed funds. Equity financing, however, does not have this requirement. Issuing stock can increase a company’s capital funds while avoiding immediate repayment through interest payments. The company also does not have to pay dividends when issuing stock, another advantage to saving cash while using external funds.
- "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011