Cash flow management can mean a bunch of different things, but in its simplest form, its all about allowing profitable sales to occur on a timely basis while minimizing out flowing cost amounts and improving the timing of inflows and outflows.
Here’s one example that touches on all of these areas and is over looked by many businesses.
A company is in a growth mode in an industry where they are in the middle of a distribution channel.
Even though the company has a strong balance sheet, credit, and cash flow, they can’t find a bank to finance their growth plan as many institutions, especially these days, are cautious towards anything moving too fast. In order to maximize revenues with the credit available, trade credit is stretched out to the max, forgoing all discounts, eliminating potential credit limit increases, and potentially harming credit overall.
The company turns to asset based lending and gets their accounts receivable factored at the god awful rate of 18% per annum, plus transactional fees. Sales double as there is now enough cash flow to cover the gap between collecting money and paying the bills. Trade credit discounts are taken full advantage of also causing credit limits to increase.
The net effect is that the business not only more than doubles its profitability as more sales are being spread over the fixed costs, but the trade credit discounts along are enough to pay for the incremental cost of financing that was created from going from bank margining of accounts receivable to factoring.
Obviously this exact scenario isn’t going to hold true for all companies. The point here is managing cash flow is about generating more net income for the business at the least amount of cost. The least amount of cost doesn’t mean you can’t use higher priced debt to fuel your business financing needs. What it does mean is there ways to gain cost savings in one area to offset increases in another where the net overall effect is going to be positive to the business bottom line, balance sheet, and cash flow position.
The example cited above occurs more often than you might think in growth markets and in some cases the trade discounts generated through more available cash flow are actually greater than the higher cost of asset based debt, driving profit to the bottom line due to use of the higher priced money.
I’m not advocating here that higher priced debt is good or bad. This is about what’s relevant to a particular situation and what net impact available capital will have on a growth situation, regardless of the cost.
If the results are positive, press on and grow the business, all the while looking for cheaper sources of money.
If the results don’t add up, then twist the rubic’s cube in other directions and see if you can find another angle to improve cash flow and profitability.