A Detailed Analysis On Business Drivers in Finance

Let’s look at Cash Flow Drivers for a Business and why you need to optimize them in this detailed article.  Most companies focus on Business Drivers In Finance to achieve success. These elements are also sometimes called Cash Flow Drivers (CFDs) as they influence the financial health of the company. A low cash flow will have an adverse impact on the business. Organizations with a low cash flow will struggle to make payments to their suppliers and related parties. This is why it is necessary to understand the kinds of Business Drivers In Finance. This article will educate you on various concepts related to cash flow drivers like tips to identify and optimize them for the company’s benefit.  

Cash Flow Drivers

Any factor that affects the cash flow of a business is a cash flow driver. These factors are responsible for a company’s growth and financial health.

They help the management understand the impact of their strategic decisions on the cash flow. Understanding Business Drivers in Finance is important as it assists in predicting the future of the company or ascertaining its value.

Tracking the cash flow drivers will allow you to 

• Evaluate profits and growth prospects
• Gain the ability to assess the business’s sustainability and trajectory.

An analyst can use the cash flow drivers to guide the management on internal financing apart from performing its valuation for investment. Negligence to consider all cash flow drivers can result in catastrophic mismanagement due to incorrect decision-making.  

Why is the Identification of Business Drivers in Finance Important?

To begin with, cash flow drivers are essential for external as well as internal stakeholders like banks, investors, management, etc They promote efficient decision-making for every party linked to the organization. 

The liquidity position of the company can be identified with the help of CFDs. It becomes easy to know the available cash balance to run the business operations. Also, they shed light on requirements for short-term financing, if any.

An analyst can share recommendations with the concerned departments like the need for the creation of a cash reserve for the future alongside explaining the value of the cash reserve by performing a comparison between the company’s past and present performance and thereby predicting the trajectory related to the future cash flow.

The Business Drivers In Finance let the management review the existing mechanisms before carrying out capital restructuring exercises.

In simple words, they are indicators of a business’s performance in the market that facilitate the evaluation of performance for strategic decision-making that promotes improvement and growth for the company.

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Ways to Identify Cash Flow Drivers

Don’t you think it is important to understand how Business Drivers In Finance are identified after learning their significance? Yes, it is necessary to seek knowledge on how an analyst identifies them for mutual benefit.

Most companies employ cash flow models to understand their financial position to meet their long-term debt obligations. 

Not just that, the developed models can measure the liquidity position of the organization as well. Once the management finds out the financial position, they can prepare themselves to obtain funds if the company requires external or internal financing to carry out operations.

Tracking the cash flows allows the management to determine the impact of drivers on the cash flows and thereby promote informed decision-making. Better decisions reduce the risk of bankruptcy for the company

Multi-layer models allow analysis that helps in identifying the long-term and short-term patterns in the business. Models project the performance of the company and encourage the management to fix targets and create appropriate budgets.

The effects of capital allocation and certain investments can be studied using Business Drivers In Finance to guide the future of the company.

 Some of the Common Ways to Identify Business Drivers in Finance Are:

• Revenue Growth Analysis
• Profitability Analysis
• Net Working Capital and its performance
• Cash Conversion cycle(CCC)

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Kinds of Cash Flow Drivers

We have discussed the ways to identify cash flow drivers and the importance of identifying them. Now is the time to look at the different kinds of cash flow drivers.

Here are a few Business Drivers In Finance listed for your reference because optimization of cash flow drivers allows the management to take control of a company’s financial health and promote sustainability.

• Revenue growth
• Gross Margin
• EBITDA margin
• Capital expenditure
• Accounts receivable
• Accounts payable
• Working capital

Revenue Growth: Growth in the sale of goods and services of the company over a period is called revenue growth. This is considered a crucial cash flow driver as it has the ability to influence the cash inflow

Revenue growth can be boosted by allowing the expansion of the customer base, and the launch of new services or goods alongside optimizing their sales and marketing strategies

Gross Margin: It is the percentage obtained from the difference between the cost of goods sold (COGS) and revenue. A higher gross margin indicates a company’s increased ability to make more profit for every dollar of sale

Management of the Company Can Improve the Gross Margin by 

• Optimizing the pricing strategy
• Reducing the costs related to production
• Negotiating with suppliers for better terms.

EBITDA Margin: These margins determine the operating profitability of a company. A healthy EBITDA margin is an indication that a company is good at generating cash from its core operations

One can improve EBITDA margins by focusing on

• Operational efficiency
• cost control
• Refining service or product mix

Capital Expenditure: Capital expenditure is also written as CapEx. This is used to display investments related to long-term assets like property, technology, or equipment, Though it is important for growth, it can directly negatively impact the cash flow

CapEx can be used to increase cash flow through optimization which needs prioritizing 

• Projects linked to potential returns
• Improvement of forecasting and budgeting
• Seeking alternative sources for funds like vendor financing or leasing

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Accounts Receivable: The amount that is yet to be paid to the company by the customers and debtors is accounts receivable. Effective management of accounts receivable can increase cash inflows

It is easier to clear accounts receivable by 

• Employing a strong credit policy
• Streamlining processes like invoicing
• Offering incentives to payers for making early payments
• Regularly tracking overdue payments

 Accounts Payable: This cash flow driver is the opposite of accounts receivable; the money company owes to its creditors and suppliers is called accountable payable. Optimization of cash outflows will facilitate the preservation of cash

Accounts payable can use the below strategies to improve cash flow

• Negotiation with suppliers on terms related to favorable payments
• Effective usage of early payment discounts
• Implementation of the latest technology for automation and streamlining of accounts payable process.

Working Capital: The balance left after deducting current liabilities from current assets is called working capital. It is considered the critical cash flow driver as it shows the ability of the company to deal with short-term financial obligations

Working capital management can be raised by focusing on

• Reduction in inventory levels
• Records of expenses that are under control
• Collection of payments in advance

Advantages of Cash Flow Management

The main reason for determining the cash flow drivers is to improve the management of cash in the business. Better cash flow management lets the company enjoy the below benefits.

• Salaries on time
• Purchase of raw materials
• On-time payments
• Efficient planning and coordinating
• Creation of cash reserves to avoid overspending
• Business expansion
• Acquirement of a business loan

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Salaries on Time:

Employees are crucial resources for any company. They work hard to keep the operations going. Ensuring to credit salaries to them on time makes the workspace a healthy environment; employee retention and satisfaction.  Strong cash flow management promotes the creation of a reserve for the payment of salaries to the workers. 

Purchase of Raw Materials:

Isn’t it clear that cash is required to buy required materials for the production of goods? Good cash flow management will allow the management to obtain required raw materials alongside giving them the freedom to expand the product line.

On-time Payments:

Management of cash flow will shed light on the expenses of the company; present, past, and future. Which usually are loan repayments, taxes, utility bills, or other expenses. When there is good cash flow management, the company can pay expenses without delays.

Efficient Planning and Coordinating:

It is a fact that a business without a plan is a disaster. Cash flow management will allow the business owners to plan, review the company’s performance, and make profits from the operations. It is also helpful in the preparation of budgets for future years. 

 Creation of Cash Reserves to Avoid Overspending:

It is not possible to create a reserve if a company doesn’t track the cash flows. Once a company manages cash flows, it can track its financial habits and accordingly limit overspending and create reserves. Cash flow forecasts permit a business owner to monitor expenditures, gain control, determine profitability and liquidity, and create cash reserves to meet tough financial situations. 

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Business Expansion:

One of the benefits of cash flow management is its ability to expose the business to growth opportunities and investments. Cash flow statement analysis is essential for companies as it lets the management find out the ratio between income and expenditure to assess the current financial position and thereby make budgeting decisions.

For instance, a surplus can be utilized to release new products into the market or establish offices in other parts of the world. 

Acquirement of a Business Loan:

Believe it or not, no company runs on its own money. Almost every organization seeks help from financial institutions like banks for funds. When a company is in a cash deficit situation, it can reach out to its financiers.

They grant loans only after reviewing the company’s financial position to understand its repayment capacity. A company can submit its cash flow statements for the same and obtain loans when required. 

Cash Flow Improvement Strategies

We have discussed cash flow management. Now it is time to learn tips to improve it. Companies that follow the below strategies have succeeded in improving the flow of cash in their organization. 

• Leasing
• Offer discounts
• Check credit rating
• Sell unsold inventory
• Send invoices
• Employ electronic payment methods
• Early payments to the suppliers
• Savings accounts with high interest rates
• Increase pricing
• Government support
• Professional advice
• Streamline processes

 Leasing:

The majority of firms consider leasing as an expensive task. But it is one of the best choices to clear off expenses that result in increased income. This tip is beneficial if you have sufficient cash balance to maintain day-to-day operational expenses. Leasing facilitates payment in small increments thus promoting cash flows.

As lease expenses are categorized under business expenses, they can be an advantage during tax calculation; and can be written off.

Offer Discounts:

Who doesn’t love incentives? None. If you have customers who make payments in advance, give them incentives. This will not only benefit the customer but also you as you receive payments on time.

Check Credit Rating:

Not all customers are good with making payments on time. This is why it is necessary to perform a check on the party before entering a contract. If you find a poor credit rating, you can be prepared to receive delayed payments or avoid signing the agreement. If you decide to enter into a contract with such customers, be sure to mention a high interest rate to safeguard your money. 

Sell Unsold Inventory:

Some businesses are involved in the production of a variety of goods. However, they fail at selling a few products. Such goods must be gotten rid of. Because their value won’t appreciate over time and they may not be sold anytime.

Such items create an obstruction in the passage of cash flow. It is essential to find a party to sell them for a reasonable price. 

Send Invoices:

Whenever you make a sale, ensure to send an invoice with understandable terms and conditions. Ensure to mention late fees for buyers who fail to make payments on time. All the important points must be bolded so that the customer doesn’t blame you in the end. This practice will help you receive money on time. 

Employ Electronic Payment Methods:

This is a tip useful to the business. If a company buys a certain good or raw material for commercial purposes, it can choose electronic means to transfer the money. Electronic means give the opportunity to make payments until the next day or sometimes active til 21 days as agreed in the contract.

Avail of the business credit card for the same. This way you can improve cash flow. This doesn’t mean that you should accumulate all payments until the last minute. 

 Early Payments to the Suppliers:

This is no brainer; just like a business owner, even a supplier wants to receive cash on time. Ask if the supplier is in a position to offer discounts for early payments. If the supplier is ready to give discounts, avail of them by making early payments. This will reduce the payment amount and create opportunities for cash reserves. 

Savings Account With High-interest Rates: 

Maintain a savings account with a high interest rate. This will promote liquidity and improve your cash position. It is a smart way to let your money work while you focus on other critical activities. 

Increase Pricing:

To begin with, this strategy may scare you. The reasons are obvious; high probability of experiencing reduced sales. But if your customers love your products and services, they won’t back off from paying some extra bucks. If they are ready to pay an additional sum, you both win and your cash flow improves. 

Government Support:

There are some government programs that help a business reduce debt and increase the cash flow. However, there is an eligibility criterion to apply for the programs. Some of the schemes may be to grant tax relief, taxes, and wage subsidies. A business can visit the authority online platforms to check the eligibility criteria and accordingly apply

Professional Advice:

The main responsibility of an accountant, insolvency practitioner, or lawyer is to assist a business in reducing its debt. They are experts in assessing a company’s financial position, exploring the available options, and advising the best action for the improvement of cash flow.

They are trained in helping a company in dealing with its creditors, settlements, and insolvency problems, like liquidation. That being said, it is crucial to research and then avail of advisory services for fruitful results. 

Streamline Processes:

It is important for a business owner to know the routine tasks. Having knowledge about daily basic activities can be helpful in employing automatons to promote efficiency in work. This will reduce labor costs and allow technology to take over a few day-to-day operations. 

Final Thoughts on Business Drivers In Finance

A company’s success runs on various aspects. Business Drivers In Finance are one of them. These are activities and conditions that have an impact on the functioning of a company.

These are also referred to as cash flow drivers. They affect the flow of cash in a business. They have to be given attention to finding out growth prospects and evaluating profits for a business.

Monitoring cash flow drivers allows the management to gain the ability to assess the business’s sustainability and trajectory. Identifying the cash flow drivers is necessary to facilitate decision-making for management and the stakeholders.

The CFDs point at the liquidity position of the company and thereby assist in making decisions pertaining to the usage of available balance to carry out the daily operations and place a request for financing if required.

Cash flow statements of the business can be analyzed to encourage the maintenance of cash reserves and capital restructuring for the growth of the organization.

Out of the many ways to identify the Business Drivers In Finance, Revenue Growth Analysis, Profitability Analysis, Evaluating Net Working Capital and its performance, and Cash Conversion cycle(CCC) are a few approaches used by companies.

 The prevalent cash flow drivers in the industry are

• Revenue growth
• Gross Margin
• EBITDA margin
• Capital expenditure
• Accounts receivable
• Accounts payable
• Working capital

The main reason for determining the cash flow drivers is to improve the management of cash in the business which attracts benefits such as on-time payment of salaries to the labor, raw materials purchases, on-time payments to suppliers and creditors, efficient planning and coordinating of business activities, creation of cash reserves to avoid overspending, business expansion, and acquirement of loan when required. 

However, not all companies are experts in maintaining good cash flow management. Such entities can get their hands on cash flows by following the below strategies.

• Leasing
• Offering discounts
• Checking the credit rating of the customers
• Selling unsold inventory
• Sending invoices to the customers
• Employing electronic payment methods
• Making early payments to the suppliers
• Maintaining savings accounts with high interest rates
• Increasing pricing
• availing of government support
• Seeking professional advice
• Streamlining processes

FAQs on Business Drivers In Finance

What are the common Business Drivers In Finance?

Any activity or condition that has an effect on the financial and operational health of a company is called a business driver. The aspects that drive cash flows in a company are also considered Business Drivers In Finance. Some of them are Revenue growth, Gross Margin, EBITDA margin, Capital expenditure, Accounts receivable, Accounts payable, and Working capital.

What are the advantages of having good cash flow management?

Companies that efficiently manage their cash flows can enjoy advantages like on-time payment of salaries to the labor, raw materials purchases, on-time payments to suppliers and creditors, efficient planning and coordinating of business activities, creation of cash reserves to avoid overspending, business expansion, and acquisition of loan when required. Any company that aims to achieve efficient management of cash flows must consider the external as well as internal expenditures, balance, reserves, and external conditions and then try out strategies for the achievement of desired results. 

Are there any ways to improve cash flows in a company?

Yes, the most common strategies implemented by businesses for the improvement of cash flows are Leasing, Offering discounts, Checking the credit rating of the customers, Selling unsold inventory, Sending invoices to the customers, employing electronic payment methods, making early payments to the suppliers, maintaining a savings account with high-interest rates, increasing pricing, availing of government support, Seeking professional advice, and streamlining processes.