CASH-FLOW-DRIVERS

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

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