Cash flow is driven by a number of factors including:
Accounts Receivable – this refers to the amount of money owed to your business by your customers. If customers pay quickly it will have a positive impact on your cash flow but if customers drag their feet in paying it can put cash flow under pressure.
Accounts Payable – is the amount of money your business owes to its suppliers. If you use your supplier trading terms to the max it will have a positive impact on your cash flow. Paying your suppliers too quickly can put pressure on your cash flow.
Inventory – the amount of money tied up in inventory can have a massive impact on cash flow. When buying inventory you are outlaying cash and you don’t get your cash back until you sell it. If large amounts of inventory sit in your warehouse for a long time it ties up cash that can put significant pressure on cash flow.
Work in Progress – refers to projects that are not yet complete. Work on long projects can put pressure on cash flow, as it can be a long time before any cash is received for the work or product and a lot of funds have already been invested into the project.
Profit and Loss – in our last blog post we went to great pains to point out that profit alone does not drive cash. However it has to be mentioned that profitability is a major factor that will drive cash flow. Things that will have an impact include revenue growth, price changes, overhead costs and gross margin on your products and services.
Asset Purchases – refers to the spending on items such as equipment and motor vehicles. These sort of items are very expensive and would be the biggest outlay your business will make. How you handle the purchase of your assets will determine the effect it has on your cash flow. For example leasing instead of buying outright.
Loan/Lease Repayments – refers to the finance repayments that need to be made by your business every month.
Next month we will continue our series of blog posts on cash flow where we will discuss how to manage your debtors to keep your cash ticking over.
What factors have the most effect on cash flow in your business and where do you feel the most pressure?
I would love to hear your thoughts!