Business Acumen 101 – The Effects of Positive Cash Flow
Yesterday, I discussed the impact of negative cash flow and how it can create major disadvantages to an organization of any size. The effects of a negative cash flow can range from a loss of competitiveness to placing a company in bankruptcy court.
Today, I want to talk about the impact of positive cash flows on an organization. Since Cash is King – then it becomes simple to understand that a positive cash flow creates cash. So, what are some of the effects of a positive cash flow. The following are the key impacts of a positive cash flow:
First, a positive cash flow keeps the bankers and lenders happy. This means that executives are not having to spend time and energy justifying their business decisions. Thus, the leaders of the organization can focus on important strategic issues and optimizing day to day operations. This is very important to the continued health of an organization.
Second, a positive cash flow allows the leaders of an organization to use the extra cash to reduce debt. Reducing debt can come in two primary forms: 1. Paying their payables early and taking advantage of discounts; and 2. Paying down loan balances. Both of these actions have favorable results. The discounts taken on early payment can offer lead to lower cost of goods and higher gross margins. The early payment on loans reduces the interest expense on the lower principle amounts leading to lower operating cost and a possible lower break-even level for the organization.
Third, the flexibility of choice for leaders is an advantage to the organization. Greater choice actually gives an organization more control over their destiny. No one else is making demands on the use of cash – like a lender demanding certain actions or decisions to conserve cash (actually to protect their loan position). More choices allow a management team to exploit opportunities that others may miss without the cash needed to act.
Fourth, expansion and growth can only come from spending more cash on these opportunities. If growth is occurring AND cash flow is positive – the company is probably whipping the market big time! This is a clear sign of a market leader – growth with profitability and positive cash flow. Even if growth is exceeding the organic growth of cash from operations – it will take cash flow in the future to pay back any loans used to fund the additional growth.
Finally, organizations that have a strong positive cash flow are fun to work for and with due to the flexibility of cash availability. New equipment can be purchased, improvements in facilities, updating operations and warehouses, and expansion opportunities come with cash availability. Usually financially strong organizations attach the higher quality employees or talent. Energy levels are higher and flowing, rather than the fearful group in the negative cash flow organizations.
A note for sales people at this point. You must be aware of cash flow and its impact in dealing with customers. Some of the things that help cash flow:
- Selling at higher margins – which creates more discretionary cash.
- Selling to customers who pay their bills faster. 30 days is better than 45 or 60 day terms.
- Sell to more financial strong customer so outright losses are lower.
- Sell higher levels of product mix to lower inventory carrying expenses – saving or converting cash.
- Increase the inventory turns to create higher velocity of cash flow and higher returns.
- Negotiate harder to lower expenses or commitment of “marketing funds” to distributors.
- Find ways to provide services with little extra cost involved – or maximize existing resources.
These are a few of the ways a sales person can influence cash flow in a positive way. Any thing in the opposite direction of the above list moves the needle of cash flow toward the negative side.