Cash flow is the inflow and outflow of money within a business. Cash enables a business to settle its debts, reinvest into the company, pay expenses and create security around any future finances. Certain factors have a significant influence on business cash flow and mismanagement of these can result in rapid failure. This is why we have outlined the crucial cash flow drivers in business, how to effectively manage them and harness business growth.

There are 6 main cash flow drivers in business:

  1. Accounts Receivable
  2. Accounts Payable
  3. Revenue Growth
  4. Cost of Goods Sold (COGS)
  5. Selling, General and Administrative Expense (or Overhead)
  6. Inventory

Accounts Receivable

Accounts receivable is one of the most significant cash flow drivers in business. So much so, that your outstanding receivables can determine the survival of your entire business. Keep in mind, cash is the lifeline for your business and an order isn’t complete until the payment is received.

‘Accounts receivable days’ is how long it takes a customer to pay when payment is made on credit terms. A customer may have 30 days to pay their invoice off, however, they don’t always pay on time. Therefore, even though the terms of repayment is 30 days, the number of days of accounts receivable is much longer.

As a whole, the difference between when an invoice is created versus when it is actually paid in full can severely impact the cash flow of a business.

Accounts Payable

One of the core cash flow drivers in business is accounts payable. When a business purchases goods or services, these are typically purchased on account with a set payment agreement. This is also known as ‘accounts payable days’. for example, a … might supply a business with … on a monthly basis. The .. ‘s payment terms are 30 days, therefore the business has this time to pay the invoice in full. Contrarily to accounts receivable, payments to suppliers are often paid quicker compared to the inflow of cash into the business. Think about it, if a business has to spend all of its current cash on suppliers, while waiting for receivables to come in, they are only able to operate at a limited level as cash is tight.

As a result, the quicker a business can receive and turn purchases into their own products, the faster they are able to sell to customers and produce an inflow of cash. Therefore, creating a need to:

  1. Minimise supplier order-to-consumption lead time
  2. Reduce inventory which is work-in-progress
  3. Optimise use of credit terms with suppliers by focusing on inbound logistics

Revenue Growth

One of the major misconceptions is that generating more revenue will improve a businesses cash flow. However, this is not the case.

Increasing sales can in some cases increase cash flow problems in your business. In order to sell, this requires money – You need to pay for materials in order to produce and maintain stock, as well as labour to sell the product. When it comes to service-based businesses, increasing sales requires more hours to complete the additional work. And, keep in mind, there is no guarantee that you will receive payment from the customer immediately. Overall, you need enough cash to cover the cost of operating expenses and labour. So, if you’re already tight on resources, an increase in sales can drastically impact your cash flow.

Cash isn’t just generated from customers, it is generated from ‘good’ customers. These can be defined as people who have a genuine need for a product or service, allowing a business to generate a consistent, competitive return on investment. Consider how to:

  1. Identify ‘good and ‘bad’ customers based on individual account profitability.
  2. Retain current customer base
  3. Develop new, profitable customers to increase cash flow
  4. Become more cost-competitive by reducing inventory

Cost of Goods Sold (COGS)

One of the next key cash flow drivers in business is Cost of Goods Sold (COGS). Your COGS are essentially any costs directly involved with producing your product or delivering your service.

Reducing your COGS impacts your bottom line, by directly increasing gross profit and net profit. In order to reduce this, you could buy your materials in bulk, negotiate with suppliers for better costs and reduce your waste. for service-based businesses, you should pay close attention to increasing efficiency in work practices and job management. COGS by far has the greatest impact on cash flow – even if you were to reduce this by a 1% you will notice a significant difference in your bottom line.

Selling, General and Administrative Expenses (or Overhead)

Another one of the crucial cash flow drivers in business is Selling, General and Administrative expenses, also known as Overhead. Some typical overhead costs include advertising, insurance, accounting costs, legal fees, rent, repairs, taxes, supplies and more.

Reducing your overhead will ultimately increase cash flow. Unless you are already tight on cash, there are always a few ways to avoid bankruptcy and gain competitive differentiation. Consider how you could:

  1. Improve internal processes and reduce your overhead expenses to increase cash flow
  2. Reduce lead time on customer order-to-delivery
  3. Reduce finished goods inventory

Inventory

Inventory is by far one of the most elusive cash flow drivers in business. Why? Well, inventory is represented as a current asset on the balance sheet. However, Inventory is sitting in a warehouse consuming cash and is often quite difficult to liquidate. This is a bit backwards considering it is labelled as an ‘asset’ – You could almost argue it is a liability.

The other key point about inventory is that although it is a tangible thing, the costs and cash impacts are not visible. It is difficult to determine exactly how much cash is being consumed by inventory sitting in a warehouse. When it comes to product costs, obsolescence and shrinkage drain cash. With service costs, taxes, interest and material handling drain cash.

Additionally, there is an opportunity cost when it comes to money being tied up in inventory and there is space used to store it. Any way you put it inventory consumes cash. A key solution to this is consistent, high-performing tasks. Therefore, consider how to:

  1. Eliminate inevntories and conserve cash
  2. Gather the data rewuired to calculate the actual costs of carrying inventory

There’s no doubt about it – Cash is King

Are you looking to drive the inflow of your businesses cash? Our financial advisors are experts in identifying cash flow issues and constructing curated solutions to get your business on track to sustainable growth.

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