Cash Flow Optimization

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Cash flow optimization


According to Condusef, SMEs are small or medium -sized companies in terms of revenue volume, equity value and number of workers. This same classifies small business as those companies that have less than 50 workers and generates a maximum of 100 million pesos annually. Medium enterprises are those ranging from 31 to 250 workers and have an accumulation of sales of $ 100.01 million pesos to $ 250 million pesos annually. 

Today there are 4.2 million economic units in Mexico of which 99.8% are considered SMEs. These contribute 42% of the Gross Domestic Product (GDP) and generate 78% of employment in the country (Condusef 19). Currently only 20-25% of SMEs survive the first two years of their creation and have an average life of only 7.7 years (Pizzi 19). The failure of these companies is due to the innumerable challenges they face and also the lack of knowledge and experience. 


The two biggest challenges with which these companies face are the lack of optimization in cash flow and financial activities. The cash flow is defined as the flow of inputs and cash outputs of a company for a period of time. SMEs that do not go ahead do not carry a good accounting record that helps them maximize their cash flow and know how your company is going. 

Companies that carry a record only do the basics which allows them only to give a small idea of profitability. When a company does not have exact and reliable information, this leads to an incorrect decision making and also to poor financial planning (Sánchez 18). This is one of the most important factors, since it is one of the main causes for which 43% of Mexican SMEs close.

The first way to optimize cash flow is to carry out a financial analysis. Financial analysis is an evaluation of the viability, stability and profitability of a business. There are many ways to do so, but the most common is reviewing the accounting record. The accounting record consists of the balance sheet, state statement and cash flow status. Another way to review the information can be using a horizontal analysis and vertical analysis.

Horizontal and vertical analysis are simple analysis that every company should do. These allow to evaluate the financial performance of the company in the present and compare it with the performance in past periods. Financial statements of consecutive periods are used and measure the variations, increases, and decreases in those periods. They help the owner or the person in charge of finance realize the trends that their products or service have.

Already with this information companies should make a financial diagnosis. Financial diagnosis identifies the weaknesses, threats, opportunities and strengths that were seen when doing a financial analysis. Through its interpretation it is possible to adjust the operational performance of the organization. This lets the company realize that areas have to be improved and which are leaving the greatest performance. The problem with many of these companies is that the owners hire people to generate the information, but do not know how to interpret it. Although the optimization of cash flow is also very important, it is also vital to have good financial operations and strategies.

Optimize financial operations

The second largest challenge they face are companies are financial operations. Financial operations are all those that exchanges financial capitals. These activities go beyond just using credit and paying debts. This also includes investments, obligations or any other way to raise funds for every day activities.

The first way to optimize financial operations is financing. Financing. Financing sources are strategic tools that help ensure financial sustainability. There are 5 types of financing from which a company can acquire funds. The first is the bank, which is when a company asks for a loan or a credit line directly to the bank.

 The second is Private Equity, which is when they ask capital to companies that manage funds in exchange for a percentage of shares. The third is known as Business Angels. These are individuals or other companies that not only offer money, but also experience, advice, and knowledge. The fourth is the venture capital, which are societies that are dedicated to investing in high -risk companies. The last are government funds, which are the various lines of financing and support offered by the government.

The second way to optimize operations is investment. This is defined as the placement of capital in an operation, project or business initiative in order to recover it with interests. Companies think that investing is very complicated and you need a lot of money, but in reality there are many options that do not need so much money. 


These options can be very attractive, since they are very easy and anyone can do it. For this type of investment in which you invest money and generates interest it is easy to maximize it using the Baumol model and the Miller Or model. These two economic models help determine the optimal cash balance. These models indicate the owner when and how much to pay the suppliers and how much and when to withdraw from their investments

Free Cash Flow Optimization Essay Sample

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