Your ability to generate strong cash flows in your business is determined by how well you:
- Drive profitability – Over the long-term, generating strong profitability is the most important driver of cash flow. See my post on the four drivers of profitability.
- Convert assets into cash – The speed in which you convert assets like accounts receivable and inventory into cash is more important than many business owners realize. Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO) are two metrics that will help you manage and monitor the speed in which you turn these assets into cash. These two metrics are even more important if you are growing your business rapidly. See my post here on DSO.
- Plan and control capital expenditures (capex) – These are the purchases you make for longer term assets to sustain your existing business as well as to invest in new assets to create future growth. Capital expenditures are poorly managed in most companies. It's like every company has a "capital expenditures back door" that is left open and seldom monitored. The result is a big drain on your cash flow. See my post here on how to properly plan and monitor your capital expenditures.
- Manage debt - Debt can be an important tool in helping you build your business. But it can also be misused and become an anchor around your neck (and your cash flow). One of the reasons to focus on generating strong cash flows is to help you pay down debt on an accelerated schedule. I talk more about using debt wisely in my 3-Part Plan to Breathe Financial Life Back into Your Business here.
We all know that generating strong cash flows is the path to surviving and thriving in business.
Which of the four drivers of cash flow needs your time and attention the most right now?
Remember, it's all about the cash! J
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