Understanding Cash Velocity

The rate at which money changes hands, and the amount of currency, in a specific time period, is called the velocity of cash. This, as a ratio, is measured by the GNP to the country’s money supply.  By the dimension of time, cash velocity is a complete cycle, cashing in and cashing out on funds.

Cash velocity has many advantages. You can spot many cash shortages (if there are any) almost immediately, if you know exactly how long your working capital is tied up for. On the plus side, there may be surpluses which can be invested for an extra profit. 

Understanding cash velocity is one thing, but using the metric to make your budgets and expenditures more accurate, can be very helpful. So, for example, a cash-to cash flow cycle, would be as follows:

The first step would be paying for raw materials and equipment that will be used to complete your work. The next step would be the time that it would take for your product to be completed, packaged, and delivered to a shop/customer. When invoicing the shop/customer for the products you have just sent, the final step would come once you have been paid.

The best thing to keep in mind would be to increase your sales. Also, to lower your manufacturing costs. By doing these two things, along with reducing the time scale between the time you started your work, and the time you was paid, this is how you will increase the amount of cash you generate.

Delaying outlays for as long as you can, and avoiding any outlays that are unnecessary is the first step. You would continue on by encouraging customers to pay what they owe. The companys cash reserves will build up over time if you have expanded in a timely fashion and its generating a profit.

You may also have inventory or materials sitting around on shelves or stock in the cupboard. Of course, having too little stock  is never a good sign. No one wants to turn a customer down if something is out of stock. On the other hand, having too much stock / materials isn’t good either. 

For example, in the clothing industry, these clothes can go out of fashion and become outdated very fast. Having too much stock could also result in a quick sale and loss of profit.