Cash Flow - The Key to Stability and Growth

One of the basic gray areas we experience in distribution is the concept of cash flow. What is cash flow? The term is tossed around but rarely used precisely or discussed in a practical manner.

In laymans terms, cash flow is basically the cash received (coming into the business) over a specific time period less the cash going out of the business in the form of payments. You have a positive cash flow when the cash received exceeds the cash paid out: a simple concept. However, managing and controlling cash can become complex. If the cash being paid out exceeds the cash being received in the business you are in a negative cash flow position. This is critical because, if it persists, your company may be unable to pay its bills and continue operating. It is possible to find yourself in this position even if your Profit and Loss (P & L) statement says you are profitable.

Cash to Cash Cycle

This cycle is extremely important. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the more working capital a business generates, and the less it has to borrow. The cash to cash cycle is a continuous measure that is defined by adding the number of days of inventory supply to the number of days of receivables outstanding and then subtracting the number of days of payables outstanding. The result is the number of days of working capital the company has tied up in managing the supply chain.

The Formula

Inventory Days of Supply (Inventory $) / (Annualized COGS $ / 365) = Inventory Days of Supply

Days Sales Outstanding (Receivables $) / (Annualized Revenue $ / 365) = Days Sales Outstanding

Days Payables Outstanding (Payables $) / (Annualized Material Costs $ / 365) = Days Payables Outstanding

E-mail rick@ceostrategist.com if you would like a copy of the Cash to Cash calculator to see what kind of impact managing this cycle can have on your cash flow. Just fill in the grey areas with your company numbers and the excel spreadsheet does the rest.

Cash Flow Culture

Create a cash flow culture within your organization. Ignorance of cash flow dynamics can be as deadly to your company as fraud, fire or the competition. If key managers really understand the concepts of cash flow and integrate that knowledge into their management style, then there is no circumstance or problem that cant be handled in a much more effective and efficient manner. A culture shift is required and it may start with simple basic cash flow analysis training. http://www.ceostrategist.com/resources-store/understanding-the-balance-sheet-and-profit-loss-statement.html

Once the culture shift has begun, the next step is to start setting goals that directly impact cash flow. Goals such as:

Improved inventory turns
Aged and obsolete inventory reduction
Improved accounts receivable aging
Improved payable terms with vendors
Focus specific sales strategies
Outcall training
Sales effectiveness program
Cost containment -
Budget issues
Business process improvement using best practices

Goals should be specific, realistic, measurable and assigned to a single owner who will be accountable for their achievement. Attaching incentives or performance measurements to these goals can be effective.

Lastly, it should be clearly understood and reinforced that, as the Heart of Cash Flow, revenue is the most dominant contributing factor. Revenue can be theoretically increased without limit, but margin management, inventory, expense control, and receivables and payables management have a ceiling of effectiveness. Clearly, increasing the revenue stream coming into the company is the most effective way to improve cash flow. However, revenue growth alone, without consistent knowledgeable management of all the other components, can result in a negative impact on cash flow.

E-mail this to a friend or associate. http://www.ceostrategist.com Sign up to receive The Howl a free monthly newsletter that addresses real world industry issues. Straight talk about todays issues. Rick Johnson, expert speaker, wholesale distributions Leadership Strategist, founder of CEO Strategist, LLC a firm that helps clients create and maintain competitive advantage. Need a speaker for your next event, E-mail rick@ceostrategist.com. Dont forget to check out the Lead Wolf Series that can help you put more profit into your business.

Check out Ricks Adding Profit by Understanding the P&L and Balance Sheet @ http://www.ceostrategist.com/resources-store/understanding-the-balance-sheet-and-profit-loss-statement.html

Discounted Cash Flow - Keeping Tabs Of Your Future
What is meant by discounted cash flow? This is actually a type of accounting for evaluating and establishing the magnetism of any investment that we make. Through this process, we are able to give a present value to our future investments. This type ...

The ABCs of Cash Flow Forecasting
Cash flow is often called the lifeblood of a business. However the flow of cash into most businesses is uneven and there can be times when a constrained cash flow creates serious problems, even if the long term situation is positive.There are, howev...

Investing and Financing
Most of the businesses these days borrow money either in short terms or long terms basis. The majority of cash flow statements illustrate the increase and decrease of the earnings of the short term debt only. It does not report the total amount that ...

Money is An Idea - "Develop a Prosperity Consciousness"
Learning to develop a Prosperity Consciousness is the foundational element that is necessary for you to increase your position with prosperity consciousness. This will enable you to increase your means, How do I increase my means, you ask? After you...

Invoice Discounting - What Can It Do For My Business?
A growing number of businesses are experiencing issues with their cash flow because of late payment of invoices by customers and, as a result, have been turning to invoice discounting as a flexible and economic solution.What is Invoice Discounting?A ...

Succession Planning
Have you ever thought about what you are going to leave your children when you pass from this earth? Wouldnt it be a great feeling to be able to give them a really good head start in life without actually spoiling them?It really doesnt matter how o...

Accounting For A Small Business Setup
Like a small kid requires extra care and papering so as a small business/company. If you are a small business/company owner then you are the one who will have to struggle the most in making a better market position. Small businesses/companies have to...

Payday Cash Loan Tips You Can Put To Use Today
Payday cash loans and cash advance loans are available and especially useful in a variety of situations today. Payday loans may be helpful when you're having temporary cash flow problems or are facing a financial emergency and need money for a short ...

Introducing: The Plum Blossom Hammer for Hair Loss Treatment
Acupuncture to the scalp is becoming one of the treatments of choice for men and women suffering from hair loss. People who suffer from the ailment opt to do it at the clinic of a therapist practicing alternative medicine, but there are some who do t...

Natural Hair Loss Remedy And The Benefits To Be Gained
Natural hair loss remedy has always been trusted by people because it sounds so pure, so it must be good, correct? However, while some treatments work well there is no telling which one will be the most suitable for you, as everyone possesses differe...