While there are numerous reasons why any SME venture can fail, it’s thought that an incredible 82% of small businesses fail due to either a lack of cash flow or inability to manage their working capital.
This should highlight how important effective cash flow management is in any business, especially smaller ventures that lack fundamental resources or assets or have to deal with extended invoice terms that are longer than 30 days.
In this post, we’ll explore cash flow and cash flow drivers in more detail, while appraising the most important drivers in the current economy.
What is Cash Flow?
Put simply, the term ‘cash flow’ refers to the net amount of capital and cash that’s transferred in and out of a business in real-time.
Any cash received from paid invoices represents inflows, whereas the money that’s paid out and spent by your venture represents outflows.
Ultimately, every business should strive to create positive cash flows, where the money that is paid into a venture exceeds outflows during a typical reporting period. Your own company’s cash flow is probably derived from operations, investing and financing, with its precise fiscal circumstances varying according to a number of different factors.
Interestingly, there are also several methods used to analyse a business’s cash flow. These include free and unlevered cash flow and the ‘debt service coverage ratio’ (which also determines a company’s health in terms of its debt obligations).
What are Cash Flow Drivers?
As the name suggests, cash flow drivers help to determine the sustainability and projected growth trajectory of your business.
Interestingly, there’s also a wide range of potential drivers to consider, and identifying which ones are key to your firm’s profitability and free cash flow conversion is a process that every successful venture must ultimately go through.
This certainly makes it easier to understand your business’s core model, particularly as this continues to evolve in line with wider operational changes and frequent financial forecasts.
What are the Key Cash Flow Drivers?
Ultimately, you can work with consultants to help identify the most relevant cash flow drivers for your business, but there are a few universal options for you to keep in mind. These include:
- Revenue Growth: Your commercial revenues refer the income derived from the sale of goods and services. Such figures offer a telling insight into how quarterly or annual turnover, which in turn indicates the value of your firm’s core offerings and precise place in the market.
- Gross Margins: If we drill down a little deeper into your company finances, you’ll also calculate your gross margins. These reveal the business’s net sales minus the cost of goods and services sold (divided by total revenue), helping to highlight the profitability of your inventory and whether or not this is sustainable over time.
- Capital Expenditure: We’ll close with capital expenditure, which is another crucial cash flow driver. The reason for this is simple; as this enables you to comprehend how much capital your business requires to sustain its existing assets. This is truly indicative of long-term commercial health and its ability to continually deliver products profitably to the market.
