First the general rule on trade discounts: you should always take advantage of trade discounts of 1 percent or more if your suppliers require full payment within 30 days. If your suppliers offer payment terms beyond 30 days, it may be more advantageous to skip the trade discount and delay paying the supplier until the full payment is due.

Preauthorized debits are "paperless" checks that allow you to receive payments from your customers electronically. They also provide a direct deposit of your customers' payments into your account electronically, all in the same transaction. Preauthorized debits are processed using the electronic funds transfer system (EFTS). This electronic system eliminates the check processing steps for both you and your bank. Once you've received the necessary authorization from your customers, your bank prepares a computerized list of your scheduled customer payments. The computerized list contains the information required to carryout the electronic transfer of the funds from your customers' accounts for deposit into your account.

Preauthorized checks are checks that you write on behalf of your customers to pay the amount owed to you. No action is required on the part of your customers if you use preauthorized checks. Preauthorized checks don't even need your customers' signatures. On the dates your customers' accounts are due, either you or your bank will write the checks for the amounts due, and then deposit them into your bank account.

Cash outflows are the movement of money out of your business. A few examples of cash outflows are paying expenses, purchasing property or equipment, or paying back a bank loan.

Some of the delay in the postal service is the result of having your mail delivered directly to your place of business. This type of delivery entails some extra sorting so that your mail gets into the hands of the correct mail carrier, not to mention the added time it takes the carrier to actually deliver it to your address. Using a post office box is one way to accelerate the payment and deposit portion of the cash conversion period. It can reduce this delay by one to three days.

Using lockbox banking is a cash flow improvement technique in which you have your customers' payments delivered to a special post office box instead of your business address.

Payment and deposit is the final event in the cash conversion period. This step involves looking at the way you receive payments from your customers, and continues through to the deposit of their payments into your business bank account. After the completion of this step, the cash paid to you is finally available for you to use.

Diggers Plus is a small construction company specializing in excavating, trenching and other building site preparation construction. A typical project for the company takes one to two weeks to complete. Jim Backhoe, the owner, takes care of the invoicing and the other bookkeeping duties for the company, in addition to actually operating the equipment at many of the project sites. Needless to say, Jim would rather be out operating the equipment instead of sitting in the office preparing invoices!

For most businesses, the time it takes to collect on a customer's account is generally the step requiring the most amount of time in the cash conversion period. The time it takes your business to collect your accounts receivable is measured by the average accounts receivable collection period. This average defines the relationship between your accounts receivable and your cash flow.

As the name implies, this is the step where you actually fulfill the customers' orders by delivering your products or services. In some businesses, this may involve manufacturing a product before it can even be shipped to the customers. (Accelerating the manufacturing process, or the way in which you supply and deliver your goods or services, is beyond the scope of our current discussion of financial management.)

The decision to extend credit to your customers is based on your credit policy. Depending on your credit policy, the time involved in the decision making process can add a significant number of days to your cash conversion period. The call for a credit decision is likely to arise in one of two situations. The first is when you are deciding to raise the credit limit for existing customers or clients. The second credit decision arises when you are deciding to extend credit to new customers or clients. In either situation, the key to accelerating the credit decision is to do some of the credit decision work in advance of the customers' orders for your goods or services.

In this step of the cash conversion period, you issue an invoice (bill) to your customers or clients for the completed sale of your products or services. An invoice includes the following information:

Your customer's decision to purchase your product or service is the start of the cash conversion period. Allowing your customers to make their purchase decisions, and communicate their decisions to you as quickly as possible, is an important step for shortening the cash conversion period event. Here are two basic tips:

The cash conversion period measures the amount of time it takes to turn the sale of your product or service into cash available for cash outflows. You might say the cash conversion period looks at the "big picture" by taking into consideration the events that happen before the sale, as well as the events that occur after the sale. How long it takes to complete each event in the conversion period may surprise you.

Cash inflows are the movement of money into your business. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge their purchases of your goods or services to their account, then an inflow occurs as you collect on the customers' accounts.

The following are examples of some of the detailed cash inflows that you may want to include when projecting your cash inflows for your cash flow budget.

The following are examples of some of the detailed cash outflows that you may want to include when projecting your cash outflows for your cash flow budget.

In its simplest form, cash flow is the movement of money in and out of your business. It is most often described as the process in which your business uses cash to generate goods or services for sales to your customers, collects the cash from the sales, and then completes this cycle all over again.

The final step in preparing a cash flow budget is putting together your projected cash inflows and outflows to come up with your cash flow bottom line. In its basic form, the competed cash flow budget combines the following information on a month-by-month basis:

When preparing a cash flow budget, you must predict the cash outflows for major purchases, such as property or equipment, vehicles, computers, or other office equipment. Major purchases are usually the result of a business expansion, a business improvement, or a business replacement expenditure. Cash outflows in this category are generally large and don't occur that often during your business year.

This example looks at predicting the cash outflows in the cost of goods sold category in order to prepare a cash flow budget. A cash outflow falls under this category if it is for the purchase of inventory items resold to your customers or for inventory items used to manufacture an end product.

A cash outflow falls under this category if it is cash paid out for operating expenses. Operating expenses are all the expenses you incur while operating your business. Examples of operating expenses include payroll and payroll taxes, utilities, rent, insurance, and repairs and maintenance. A good rule of thumb is that if the cash outflow doesn't fit under any of the other three categories (debt payments, cost of goods sold, or major purchases), it's probably an operating expense.

A cash outflow falls under this category if it is for the purchase of inventory items resold to your customers, or for inventory items used to manufacture an end product. This category includes all your cash outflows for expenses included in your cost of goods sold. If your business is a retail business, your largest cash outflow is probably for the purchase of resale items. If your business involves manufacturing goods, a large portion of your cash outflow may fall into this category if you purchase raw materials and other goods used in manufacturing your final product. If you have a service-related business, it's likely that only a small amount of your cash outflow will fall under this category.

Applying your accounts receivable collection pattern from the past to your sales forecast is the best way to predict your cash receipts from the collection of accounts receivable. The following example shows how to use your accounts receivable collection pattern to project future cash receipts:

This category of cash outflows includes all regularly scheduled and unscheduled loan payments.