The net changes in the working capital, total amount of non cash expenses, and net income should be added in trying to improve the cash flow situation. The efficiency ratio should be improved immediately, if the net income cannot be increased quickly. The policy regarding the sales should be improved to make it superior. The growth of revenue should be tried with the improvement in the conditions of the market, a superior policy on pricing, and activities of marketing and sales. The fixed expenses can be leveraged to achieve the margin expanses, along with the improvement in the policy of pricing or rationalization of expenses. All departments, production, marketing and finance should curtail their expenses to improve the cash flow situation. Aligning with GAAP, the noncash expenses should be adjusted. For example, compensation which is share based, amortization, and depreciation can be adjusted in increasing cash flows from operations in relation to the net income. Nonetheless, any change in operations can lead to the values higher for these adjustments related to the noncash items having a net neutral effect on the operations of cash flows.
The changes related to the noncash expenses’ adjustments must be with a change that is equal with respect to the operating expenses reflected on the balance sheet. This can result in zero net change from operations on cash flows. This company can try and improve cash flows with the improvement of efficiency ratios effecting the working capital changes. There should be decrease in current assets or current liabilities increase that will lead to sources of cash. In other words, the cash flow will increase in such a situation from the operations. The management of inventory will improve if the inventory turnover ratio rises. The calculation of the inventory turnover ratio is done when cost of goods sold or sales is divided by inventories. The indication of the higher inventory ratio is inventory being low relative to sales. This forms the cash source. If the receivable collection improves, it will decrease the accounts receivables. The calculation of the day’s sales is when accounts receivables are divided by the total credit sales and the figure obtained is multiplied by the period’s number of days. If the outstanding sales days are on the lower side, the company would collect receivables faster and thus form a cash source.