A few days ago I happened upon a “training video” with the title “What does it mean when somebody says ‘Cash Flow is a problem’?” Besides thinking to myself, “Well duh, the cash isn’t flowing,” I thought, “Yes, I’d like to know what it means when cash stops flowing through a business and what causes it to happen.” So, I clicked into the blog of an Australian factoring firm, AR Cash Flow (in Sydney, I presume but couldn’t tell for sure from their website) to watch the presentation below.
The video does a good job explaining the seven cash flow drivers in a business (sales growth, gross profit, fixed overhead, A/R, A/P, inventory, and capital expenditures), all while using a beer mug as the container for the illustration. Not sure if this is a common metaphor in business Down Under, or if the factor is just a jolly fellow.
Either way, the only thing I got out of the three-and-a-half-minute video was the seven drivers of cash flow. The question that attracted me to the presentation (What does it mean when somebody says “Cash Flow is a problem?”) was never answered, so I’m going to take a stab at it without downing a pint first. The video did set up nicely the first part of the answer: the seven areas to explore for the source of the problem.
When cash flow is a problem for a business, it means that either the money coming in is not timed in correlation to when the bills are due or the revenue isn’t enough to cover the expenses. The first cause is a simple fix if a business can acquire a line of credit or enter into an accounts receivable factoring arrangement. A factor will advance cash on receivable invoices, thus providing a company with debt-free working capital to carry it through the 30-90 day credit term extended to its customer.
The second cause is a much deeper issue that can indicate more than just a problem with cash flow, such as a problem with the business model. This is where one or more of the seven cash flow drivers that filled the beer mug come in handy. Obviously, if sales growth is advancing at a negative rate, we’ve got a problem; or if there is no profit margin, well, duh…and if it costs more to sell a product or service than what it sells for, then the flaw is clearly in the planning (or lack thereof).
Thanks to AR Cash Flow for the means to answer their question.
Tags: business cash flow, cash flow, cash flow drivers, cash flow finance, cash flow financing, cash management, factor invoices, factoring, factoring accounts receivable, factoring companies, factoring invoices, financing small business, small business, small business advice, small business blogs, small business capital, small business cash flow, small business credit, Small Business Financing, small business funding, small business loan, small business loans, winning in the cash flow business
Thanks for the mention, letting you know that we are planning on extending on the 7 cash flow drivers as part of a series and will go in to depth on each driver over the coming weeks and months.
Leigh Dunsford´s last blog ..How do I improve my gross margins without losing business?