Do You Understand Your Cash Flow From Operating Activities
Post on: 23 Апрель, 2015 No Comment
Do Your Operating Activities Generate Or Use Cash?
Your core business activities are or should be your engine for generating cash flow in your business.
The ability to generate consistent and preferably increasing positive cash flow from the day-to-day trading activities in your business is vital to survival and ultimately to success of your business.
Booming sales and strong profits will not guarantee business viability if cash flow from operations is negative and the cash flow shortfall is not appropriately funded.
Remember the old business saying:
Sales is Vanity. Profit is Opinion. Cash is Fact.
Know & Manage Your Cash Flow From Operating Activities
The common definition of Working Capital is the ratio of Current Assets To Current Liabilities. However, this is, in my opinion, a highly static measure and not particularly useful in terms of managing cash flow. It doesnt tell you anything about timing of the cash flows. And timing is a critical element when it comes to cash flow.
Heres a video from my Cash Flow Kung Fu training series that explains how you use the Cash Flow Statement to get insights into your cash flow from operating activities.
Causes Of Negative Cash Flow From Operating Activities
Of course, there are times when a business operating cash flows are negative. And its not necessarily a drama as long as.
- the shortfall is not caused by inefficiencies in your operations eg poor debtor collection processes, sluggish inventory turnover etc AND
- you have a strategy for funding the cash shortfall in place.
Situations Where Negative Cash Flows From Operating Activities Can Be Expected
- Highly Seasonal Business
Highly seasonal businesses will have negative cash flow from operations during the low season. Working capital items such as inventory and debtors will chew up cash flow during this seasonal build up.
However, cash reserves should have been set aside from the last selling season to cover the negative cash flow during this time. If business growth means that cash reserves are not sufficient to fully fund the next seasons working capital requirements, this funding requirement:
- should have been identified during the strategic planning or budgeting process, and
- appropriate financing arrangements to fund the growth requirements should have been put in place well before the shortfall happens.
Fast growth is often accompanied by significant increase in working capital requirements, particularly if the business provides credit terms to its customers (increased debtors) and has to carry inventory.
You must have a very good handle on:
This will help you plan the right kind of financing that supports sustainable growth. Sometime, it may be more prudent to slow the growth rate rather than straining the financial stability of the business through aggressive growth.
It is essential that you do 3-way financial forecasts as part of your strategic planning. And stress test the forecasts! What if.? is the most important question to ask yourself during planning.
Supplement Cash Flow Statement With Rolling Weekly Cash Flow Forecasts
In addition to the Cash Flow Statement which gives you important strategic view of your operating cash flows, you should also be running Rolling Weekly Cash Flow Forecasts out for 8 to 12 weeks at all times. This forecast gives you insights into potential intra-month cash flow issues.
Resources:
Check out the Cash Flow Kung Fu video training series. This series is designed to help you know your finances so that you can drive strong sustainable growth and thrive.
