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Why
is the cash flow so important for the company?
What are the key drivers for cash flow increase?
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Posted
Jul 2009 |
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One of the most important key business indicators is the cash flow. Having a healthy cash flow is the must of every company. In case that company run out of the money, it will have to borrow it. No matter how much value the
company possess in facilities, machineries, vehicles, products or row materials, it is
necessary to have a good cash flow ( liquidity ) too. |
It is same as with the human body. It does not matter how tall,
well built and in shape you are, but if you bleed than all is gone. So, the company that stay out of cash and other
possibility of cash sourcing will enter a serious
business problem.
In order to maintain the right liquidity of the cash flow system, the company needs to take care about main cash
flow drivers.
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Gross margin is one of the most important cash flow drivers. Gross margin is the difference between cost of purchase/production and sales
price. Higher gross margin means more gross profit at the end of the period.
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Sales volume is another important cash flow driver. More volume will bring more revenue and gross profit. At this point the sales mix is very important. As profitability of different SKUs may vary, it is important to build the biggest sales volume from the most profitable products.
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Account receivables days are credit period in days that is given to customers. The customer crediting is common in the business, since it represent the way building of customer's loyalty. Since you give them products with delayed payment you
increase your service, but also you bind customers to your supply. But crediting of customers should be balanced. Too much credit may drain your cash pool. Low cash can bring
cash flow problem to the company.
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Inventory days represent number of sales days that can be covered by your finished goods stock. If the stock is too high, that means that too much cash is frozen on stock. Again, it is important to have
balanced, optimal stock.
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Accounts payable are credit days given from creditor to the company.
Opposite to accounts payable in this case company owes the money to creditor. This can be supplier
of raw
material, finished good or contractor for various service. Negotiation with supplier on providing the longest possible credit days is good for cash flow, since it leaves cash for some other purposes, at least for a certain period of time.
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Administrative costs are necessary, but optimal costs can improve the financial health of the company.
The list is not final, since such flow can be increased by use of other method. The reality that good cash flow can not be build by use of only one method of cash flow boost, but through combination of all
methods available
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