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Converting accounts receivable into cash is a critical process in the development of a healthy cash flow. While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments from your customers requires a steadfast commitment to a systematic process of Accounts Receivable Management. To more effectively convert accounts receivable into cash it’s essential that the credit and collection process be highly efficient in order for you to shorten the accounts receivable cycle time.

The accounts receivable cycle starts with a sale (credit sales) which in turn creates a receivable (monies due your company), and then, ultimately converts into cash. The length of time that it takes your company to complete this cycle, from sale to accounts receivable to cash, is the collection period. The shorter the collection period, the less time cash (capital) is tied up in the business process, and thus the better for your company’s cash flow.

Henry Ford once said, “Money is like an arm or leg—use it or lose it.” There is a lot of truth in Mr. Ford’s statement. One of the biggest challenges that entrepreneurs face when building a business is getting, keeping, and managing money.

In fact, of all the aspects of creating, establishing, and growing a small business, financial management is the most problematic for small business owners. When it comes to launching and growing a business, sound financial management practices are also the most critical predictor of success.

One of your company’s strongest assets is its ability to assemble anAnnual Operating Budget andCash Flow Estimate and to determine financial requirements for achieving revenue goals. In order to make wise, financial decisions, it is imperative to know your breakeven point, your direct labor costs in relation to your cost of goods sold, and your monthly cash requirements. Acquiring operating performance data, on a timely basis, strengthens your ability to better manage your business.

Reliable operational plans, budgets, and forecasts –that are accurately produced–are

Converting your inventory into cash is as critical a process for the health of your company’s cash flow, as the process of converting Accounts Receivable into cash. The effective conversion of inventory into cash requires a methodical system that efficiently moves products from order to delivery. Without a well-defined inventory management system in place, inventory stock levels may become too low or too high, resulting in lost sales and increased costs. The longer an item(s) remains as inventory, the greater the chance for the item(s) to become either damaged or obsolete and this eventually results in an inventory write-down. Slow-moving inventory adds to a slower cash flow and consequently creates greater carrying costs that must finance the inventory. The degree of success, in converting inventory into cash, is directly related to the how well the inventory cycle is monitored and controlled.