How to Build Cash Flow

Build cash flow through operations, investments and financing.

Many investment analysts believe cash is king; that is, the more cash a company is generating, the better the investment potential. Cash flow is about more than net income and earnings, however. There are two other ways for companies to increase and build cash flow. The three primary ways companies can generate cash is from operating activities, investing activities and financing activities. Each one has different consequences in terms of repayment, expense and expectations for future cash flow.

Instructions

1. Decrease receivables by trying to get customers to pay down balances faster or by selling fewer items on credit. Increase accounts payable by extending the amount of time you pay vendors for inventory. This has the effect of increasing cash flow coming in and decreasing cash flow going out in the short term. Controllers view accounts payable as a source of free short-term funding if managed properly.

2. Focus on cash flow from investing. Cash flow from investing is created when securities or investments are sold. If you own assets which can be sold for a profit, sell them to build cash flow.

3. Issue stocks and bonds, or obtain a loan. Cash flow from financing will build cash flow; however, bonds and loans must be paid back with interest. Cash flow from issuing stocks does not need to be paid back, but you are selling an ownership stake in the company in exchange for funds. This is a significant trade off.

References

• SEC: Beginners' Guide to Financial Statements