How to master a cash flow strategy that drives growth
“Cash is king!”
We’ve all heard the saying before.
In a precarious economy, cash has never been more important. As a business, having cash is a competitive advantage.
On top of that, a strong cash flow allows a company flexibility to make decisions and potential investments.
And as a finance leader, you’re in the driver’s seat.
You’re driving change and performance in your organization. And with the right tools and processes in place (think of the processes like your seat belt and the tools like your steering wheel), you can master a cash flow strategy that drives value—for your team and your organization.
What is cash flow?
Cash flow is the net amount of cash and cash equivalents being transferred in and out of a company. Cash inflows are money received, while cash outflows are money spent.
Right now, cash flow is top of mind for finance leaders. We’re seeing rising costs across the board—from raw materials to interest rates. This makes it mission-critical to be prepared and ready to manage unpredictable changes.
What’s the difference between cash flow and profit?
Cash flow is the money moving in and out of your business at a specific point in time. Profit, often referred to as the ‘bottom line’, is how much money you have left after you’ve accounted for all expenses.
Why is cash flow planning important?
Cash flow planning gives you the tools to plan and allocate resources, manage your working capital, and optimize your cash so you can continue to drive business growth.
There are certain industries where the factors affecting cash flow are more complex and projections are a focal point of each month’s analysis. Take real estate, construction, and manufacturing for example. You have to have money, or borrow money, to generate your inventory.
In construction you often are required to produce cash flow projections to get bonding or loans to fund your job. Ultimately the health of your overall cash flow is dependent on how well you manage your individual jobs. In manufacturing, efficient cash flow management ensures that the company has enough liquidity to cover working capital needs and continue operations without interruption. Real estate is another great example, where positive cash flow means you have the funds to invest in properties or land in order to generate positive cash flows.
10 ways a cash flow strategy can drive growth
It comes back to that saying, ‘cash is king’. When you’re strategically looking at your cash in and out, you’re presenting yourself with stability, operational efficiency, and the ability to invest in your growth.
Here are 10 ways your cash flow strategy can drive growth:
- Capital for investment: Maintaining a healthy cash flow gives you the resources to invest in growth opportunities, like expansion, new product lines, new markets, or acquisitions.
- Agile decision-making: When you have cash, you have the ability to take opportunities as they come up, like purchasing inventory, investing in new technology, or responding to market trends.
- Reduced debt dependence: When you have a cash flow strategy and a bird's eye view of the money going in and out, you can reduce your reliance on borrowing and loans. This lowers your interest expenses, risks, and frees up time for your team to focus on growth opportunities instead.
- Innovation and research: Positive cash flow allows you to allocate resources to R&D efforts, which leads to innovation, like new products or services, which can give you a leading edge in the market.
- Marketing and sales: Investing in marketing and sales can lead to increased brand visibility, customer acquisition, and revenue growth—all fueling your business growth.
- Employee development: A well-managed cash flow can support initiatives like employee training, skills development, and retention programs leading to a highly skilled workforce that impacts your growth.
- Working capital management: Cash flow helps optimize your working capital, so you know whether or not you have enough resources to cover day-to-day operational needs.
- Risk management: Your cash flow strategy should include funds for contingencies and economic downturns, so you can overcome unexpected challenges without impacting your growth plans.
- Credibility and scaling: Consistent, well-managed cash flow is a sign of financial stability and responsibility, improving your credibility with suppliers, lenders, investors, and other stakeholders, and presenting you with future partnerships and collaboration.
- Expansion and scaling: Your cash flow strategy is essential for scaling your operations. As you grow, your cash flow requirements grow too. But effectively managing your cash flow means you can sustain your growth without compromising your financial health.
How do I forecast my cash flows?
To model cash flow, you can build a cash flow model and supporting models. For example, let’s look at revenue.
It’s important to consider what areas of your business impact revenue.
Let’s take sales as an example. Instead of building a sales model with your systems, like Salesforce, you can look at your sales model from a cash lens.
Ask yourself a few questions:
- What are the factors that impact costs?
- What elements affect your P&L, like operating, finance, or investing expenses.
Then, look at each of those expenses and break it down. If you’re looking at operating expenses, you might start with payroll. But don’t guess the numbers, build a model for payroll so you can project your costs within 1% accuracy.
See how it all works together? Look at all of your expenses individually, break it down into a model, and build out scenarios. It’s a complex process because you have to break down all the factors and work with different data sources and modeling techniques, but the result is an accurate, predictable cash flow model that gives you the insights you need to support your growth.
How can I learn more about cash flow?
Interested in learning more about cash flow? Join us for our webinar, Mastering Cash Flow to Drive Value Creation, on September 21, 2023.
Prophix’s own Chris Porter, Director of Product Marketing and Della Giguere, Solutions Engineer, will join Denise Feece, CFO & COO at Sequel Wire and Cable and dive into cash flow, including:
- Proven cash flow strategies that help you drive business growth
- How Sequel Wire uses Prophix to take their cash flow management to the next level
- An inside look at cash flow modeling in Prophix so you can see first-hand what you can do
