Cash Flow

While profitability tells you if you're making money, cash flow reveals the all-important timing of those funds entering and leaving your business. Understanding cash flow is essential for ensuring your business has the lifeblood it needs to survive and thrive.

Cash Flow: The Stream Of Cash In and Out of Your Busines

Cash flow refers to the movement of cash in and out of a business over a specific period. It's a dynamic concept, reflecting the continuous flow of funds used to finance operations, investments, and debt obligations. A healthy cash flow ensures you have enough readily available funds to meet your financial commitments and capitalize on opportunities.

The Three Streams of Cash Flow

Cash flow can be categorized into three main categories: Operating, Investing, and Financing.

- Operating Cash Flow (OCF): This is the cash flow from your day-to-day operations. It reflects the net cash generated from your core business activities, encompassing receipts from customers (sales), payments to suppliers (expenses), and payroll expenses. A positive OCF signifies your business is generating enough cash to cover its ongoing costs. It also accounts for changes in payables, receivables, and inventory. This should be always be positive (negative operating cash flow is an immediate red flag).
- Investing Cash Flow (ICF): This stream tracks the cash used for acquiring or disposing of long-term assets, such as property, equipment, or investments. Purchases of new equipment or investments in research and development will result in negative ICF, while selling assets generates positive ICF. This should typically be negative (investing more is normally a good thing). 
- Financing Cash Flow (FCF): This stream reflects the cash flow associated with raising or repaying capital. Issuing new stock or taking out loans creates positive FCF, while repurchasing shares or paying down debt results in negative FCF. This being positive or negative depends on your goals and how your financial strategy integrates with your strategic plan. 

The Three Stealthy Drivers of Cash Flow: Receivables, Payables, and Inventory

Several factors that aren’t frequently talked about, but significantly impact your cash flow, and your receivables, payables, and inventory. 

- Accounts Receivable (AR): These are essentially outstanding invoices from customers who haven't yet paid. High AR indicates slow collection times, which can tie up your cash and hinder your ability to meet immediate obligations. Effective credit management and collection strategies are crucial for optimizing AR and improving cash flow.
- Accounts Payable (AP): These represent your short-term debts to suppliers for goods or services received on credit. Managing AP strategically can be advantageous. Negotiating longer payment terms with suppliers can free up cash in the short term, but it's important to maintain good relationships and avoid late payment penalties.
- Inventory Turnover: This metric reflects how efficiently you're managing your inventory. High inventory turnover signifies you're selling products quickly, which translates to faster cash flow. Conversely, low inventory turnover indicates slow-moving stock, which ties up cash and can lead to storage costs and product obsolescence.

By understanding these factors and implementing sound financial practices, you can optimize your cash flow and ensure your business has the resources it needs to navigate the ever-changing economic landscape.

Conclusion

Total cash flow = cash from operations + investing + financing

Operations should be generating positive cash flow.

You should typically be using cash to grow your business. 

Your use or paying down of debt should align with your strategic goals. 

For more, check out this cash flow training workshop.