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Petunia CPA HERE AT PETUNIA CONSULTANCY SERVICES We offer Expert Advice for your business plans and strategies with guaranteed success. CONTACT US OUR SERVICES Why Our Clients Choose Us. Why PETUNIA Consultancy Services is uniquely positioned to serve you in the following ways. 01. Best Team. Highly capable tea...

Petunia Consultancy Services is a consulting company offering accounting, tax and advisory solutions to our clients’ dat-to-day business. We believe in working with our clients to develop tailor-made solutions while adding value to their business operations

Do you know the 5 Steps to Manage your Cash Flow?

In Finance:

🎯Your Cash in always King.

🎯Your Resources are always constrained.

🎯Your Objective is to invest available cash and maximize Value. So here is how to manage cash flow for value maximization:

1️⃣ Understand your operating cash inflows and outflows

2️⃣ Calculate the Cash Conversion Cycle (CCC)

3️⃣ Optimize each of the 3 components of the CCC

4️⃣ Finance the CCC using the most appropriate source of capital

5️⃣ Monitor and Repeat

The Cash Conversion Cycle measures how long a company’s cash is tied up in net working capital.

Here’s the formula to calculate the Cash Conversion Cycle (CCC):

➕the average number of days required to sell inventory (days inventory outstanding or DIO)

➕the average number of days to receive cash from credit sales (days sales outstanding or DSO) ➖the average number of days suppliers wait for your cash payment (days payable outstanding or DPO)

And here’s the CCC formula broken down into its sub-components:

➕Average Inventory Balance / Purchases (or COGS as a proxy) x 365

➕Average Receivables Balance / Credit Sales x 365

➖Average Payables Balance / Purchases (or COGS as a proxy) x 365

🎯 The tricky part about the CCC is optimizing it:

⚫ you want to minimize the DIO but avoid stock outs

⚫ you want to minimize the DSO but avoid turning away customers

⚫ you want to maximize the DPO but avoid damaging supplier relationships

🎯 Once you’ve calculated your Cash Conversion Cycle and you have optimized its components, it’s time to focus on Financing.

🎯 Your Cash Conversion Cycle can be financed with internal resources only as long as there aren’t any other competing uses with higher ROI for that capital.

🎯 If there are (which is often the case), the financing of the net inventory and accounts receivable balances during their conversion periods usually needs external capital.

🎯 Cash Flow management should be part of your corporate culture, so once your financing plan is in place, proceed to monitor and repeat.

Do you know the 3 Main Cash Flow Drivers?

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
-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)

So here you have them, the 3 levers you have available to improve cash in your business:
>> Revenue
>>Operating Margin
>>Capital Efficiency

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