Increase Cash Flow By Micro Managing Purchases and Projects

Behavioral analysts have been studying for years about what processes humans use to make decisions. Experts have looked at this behavior in business as well. All decisions are made on the human perception of a person, place or thing. These perceptions can be skewed by a lack of understanding, knowledge or truths. In business, decisions are made on more than just perceptions, they are also made on the businesses dexterity, evaluations, targeting what decisions need to be made and deciding how to respond to each.

Evaluating all projects and purchases is key to making a good decision. Looking at your business' ability to make a major purchase by evaluating income and cash flow statements is vital. Decisions are not just made by analyzing the financial health of the business; it is also by the cost/benefit factor of purchases and projects. Asking yourself some questions may get you started on coming up with the best decision for you company:

* Will this project increase my revenues?
* Will this purchase make my project easier and thus increase my revenues?

If you ask questions objectively, it can help you in the decision making process. Just like any personal decision, you need to evaluate the costs and the benefits of a purchase or a project. Listing out each will help you to clearly see if they could be potentially profitable. You should be looking for ways to cut costs and raise revenues. Besides cutting costs, look for long term benefits in choices. For example, if you can purchase a piece of machinery and cut down on labor, it may take a while to see the benefit, but over time, the benefit could be quantified. Another example is changing your marketing campaign for your business. This will cost you some money in the beginning, but it could eventually draw in a different clientele perhaps willing to pay more for your product or service.

Weighing the costs and benefits can be tricky, but if you can look at both the immediate and long-term benefits versus the costs, it will help you better determine the need to begin a project or make a major purchase. The easiest way to be able to project these costs is through a cash flow statement. Design one in relation to a major purchase or project and you can quickly see the advantages or disadvantages.

There are additional tools you can use to help you determine the viability of a project or purchase. Payback period analysis will help you determine how long it will take from the initial investment to be paid back for the capital your business put into it. You can figure this out by adding what the actual savings is to the estimated savings. If this amount equals your investment, you will be able to determine at what time your return on investment will begin occurring. If you want to find out what your accounting rate of return (or return on investment) is, you can by subtracting the yearly cash flow from depreciation value and divide this by your initial investment. This will give you your accounting rate of return.

Net present value is another way in which you can determine whether a project or a purchase is viable for your business. This is a much more complicated formula, but it can be a useful financial tool. The value of the dollar at present is compare to the value of the dollar in the future. Take into account the inflation and any returns on the project or purchase. If it is a positive number, the project or purchase is a good investment. If it is negative, the project or purchase is not a good investment. Financial analyst uses this tool often to help make major decisions for businesses.

Your business may be rethinking making a major purchase or dumping the money into a project, however, it may be wise to invest any capital back into your company. This investment could be used to help expand internally and may provide a better return on investment than investing elsewhere.

As you can see, it is crucial to over analyze major purchases and large capital projects. With all of these financial tools and the help of your financial analyst, you should be able to become a better decision maker.