Cash Flow: 7 Ways to Increase Cash Out
- rsqcontent
- Jun 20, 2024
- 4 min read
Last month, we discussed the seven drivers for increasing your business’s positive cash flow. Though some of those ways are clear indicators of health for a business, there are a few that are not sustainable in the long run and could be indicators of poor health, despite the temporary positive cash flow that is ultimately the goal for your business.
Just as there are seven drivers to increase cash flow coming in, there are seven drivers to decrease cash flow or increase negative cash flow. Basically, every way to increase the flow of cash going out of your business is the opposite of what it was to bring cash into the business.
These seven cash flow drivers are:
Decrease Profit
There are seasonal businesses that operate at regular intervals with a loss of profit. And these businesses usually have a plan in place to compensate for the predictable ebbs and flows of their business. But in general, a decrease in profit means less money coming into the business during a given reporting period which, in turn, means a decrease in cash flow or even a negative cash flow. And if you are operating a budget based on a certain amount of expected profit, this decrease means your business is operating at a loss.
Again, this is not the only cash flow driver to cause decreased or negative cash flow and, again, the rest of the drivers listed each affect the Net Profit of the business.
Increase Accounts Receivable Balance
As discussed in the previous article, the balance on the books is not the only number to consider when looking at Accounts Receivables. If you have a large number for Days Sales Outstanding (DSO), it means the money owed for inventory or services has yet to be collected or may not be collected in this reporting period. That is less cash in hand or a decrease in cash flow.
Increase Inventory Balance
It’s a fine line between having too much inventory on hand and not enough. Not enough inventory means sales can’t be made or fulfilled delaying DSO. Increasing the inventory balance is not the same as maintaining your inventory balance, replacing sold inventory. Maintaining and replacing is a given in an inventory-based business. Increasing the inventory balance, however, means increasing the amount on-hand over and above what exists and what has yet to sell. Remember the key matrix for this driver is the number of Days Inventory Outstanding (DIO). While inventory may be a necessary investment for your business, a high DIO means less return on investment (ROI).
Purchase of Other Assets
This is cash going out for a given month that is not tied to inventory or services. There are very good, healthy reasons for the purchase of new assets, and it can be an indicator of growth for a business. Regardless of whether it is a one-time, healthy purchase or an expense that seems to be more consistent, it will pull down the cash flow for a reporting period. It is a best practice to weigh the purchase of new assets against the long-term value to your business. In other words, will you get a good ROI for the purchase?
Decrease Accounts Payable
Remember that like AR, the number that you want to look at as it relates to cash flow is Days Payables Outstanding (DPO). You need to pay your vendors. And it may seem like, by increasing your DPO, you are simply letting the burden fall on a later month. The assumption is not that you can’t pay now, so you’re pushing off to avoid payment until later; rather, by decreasing your DPO, more money goes out and your cash flow decreases. You could also potentially lose out on vendor deals or interest earned by keeping your cash in your bank account as long as possible.
Repay Debt
This driver needs context to accurately determine how it should be interpreted in regard to the health of your business. Paying off debt is a good thing. If you are able to increase the amount you pay each month and pay off your debt early or pay it off with one lump payment, then the decrease in cash flow this month will make way for an increase in cash flow when the debt is no longer on the books. But the bottom line is: cash is going out of your account, thus your cash flow decreases. Conversely, increasing the amount of debt in one month (positive cash flow) increases the outgoing (negative) cash flow in future months. Things happen, but as a rule, a healthy company will only increase debt to add assets or services that will have a positive ROI.
Owner Draws
Regular owner draws that are used as the owner’s salary are good and healthy. They are also easily budgeted. There are, of course, other reasons to take an owner draw. Whatever the reason, this is the final way cash goes out of the business, decreasing cash flow. Remember to keep accurate records of these draws for monitoring trends and for both personal and business tax purposes.
While a negative or decreased cash flow does not automatically spell trouble for a company, it is also not the long-term goal. By evaluating each of these seven drivers in context, a clearer picture can be gained of the health of your business then by looking at just one number, even if that number is the raw cash flow or the total profit for a month.
If you’re interested in this kind of assessment for your business, contact us. We offer free business financial assessment that accounts for these and other factors in your personal and business goals. We want to help you succeed and help your business become the well-oiled machine it can be, so you can be free to thrive and enjoy life confident in knowing your business will continue to operate as it should.
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