Your 3 Main Cash Flow Drivers
What Are The 3 Main Cash Flow Drivers? Do You Even Understand Where Your Operating Cash Flow is generated from:
☑️ Revenue Growth ☑️ Operating Profits ☑️ Working capital efficiency
How does it work? - The formula for Operating Cash Flow (CFO or OCF) is as follows:
Revenue =’s (-COGS, -Operating Expenses,) (+Depreciation and Amortization, +Other non-cash items (e.g. gains/losses on assets sales) +/ Changes in Working Capital)
Here’s how each of these components impact your ability to grow your Operating Cash Flow:
0️⃣ Depreciation, Amortization and other non-cash items do not impact cash because no cash actually changes hands in those transactions.
1️⃣ Revenue growth refers to the increase in your company's sales over time.
A higher rate of revenue growth generally leads to more cash flow, as more money is flowing into the business.
🎯 What drives revenue growth:
☑️ Sales volume: the number of units sold to new and existing customers
☑️ Pricing strategy: price increases for new and existing clients
2️⃣ Operating Margin refers to the operating income divided by revenue.
A higher operating margin means that a larger proportion of revenue is being converted into profit, which can further be used to generate cash flow.
🎯 What drives operating margin growth:
☑️ Reduction of COGS relative to revenue: better contractual agreements with suppliers, automation
☑️ Reduction of Selling, General and Administrative costs relative to revenue: marketing, payroll, overhead, shipping costs
3️⃣ Capital Efficiency refers to how effectively a company uses its assets and liabilities to generate cash flow.
If your company is capital efficient it means it is able to generate a higher return on its shareholders’ investment and has better access to funding, which can help it generate more cash flow.
🎯 What drives capital efficiency?
☑️ Efficient use of long term capital assets (PPE): your company’s ability to generate profit from the operation of its assets (ROE)
☑️ Efficient use of short term working capital assets: your company’s ability to optimize its cash conversion cycle (Days Inventory Outstanding, Days Sales Outstanding, Days Payable Outstanding)
Now you have them, 3 levers you have available to improve cash in your business:
01. >> Revenue 02. >>Operating Margin 03. >>Capital Efficiency
