Strategic CFO Services: Cash Flow Drivers


Three fundamental financial metrics—revenue, profit, and cash flow—play pivotal roles in determining the fate of SMBs. In this article, we’ll explore Cash Flow Drivers, their definitions, and how they impact the growth and sustainability of your business.

Details about the other drivers can be found here:

Strategic CFO Services: Revenue Drivers

Strategic CFO Services: Profit Drivers

Cash Flow Drivers and their Impact on Profitability

In the world of Small and Medium-sized businesses, it’s not uncommon to see profitable companies going under while unprofitable ones continue to thrive. How is that possible? The answer lies in cash flow. It’s critical to understand that profit doesn’t equate to cash flow.

Let’s first clarify the difference between profit and cash flow. Profit is your revenue minus expenses. Cash flow, on the other hand, considers the timing and management of your revenue, expenses, and other cash items not reflected in your profit. While you may be making a profit, you still must manage tasks like collecting sales, purchasing inventory, paying bills, managing debt payments, setting aside money for taxes, etc. These are what we refer to as cash flow drivers.

In an ideal world, if you make a profit of $10,000, your cash will increase by the same amount simultaneously. We could liken this to running a small food stand. You buy your ingredients in the morning, prepare food and sell it throughout the day, and customers pay you on the spot. Your profit equals your cash flow.

However, most businesses operate differently. For instance, you might offer a service today, using materials you bought three months ago, with employees you’ll pay in two weeks and hope to get paid by the client within the next 30-60 days. Meanwhile, you need to keep up with quarterly tax payments. This scenario can lead to cash flowing in and out from various directions, none matching your monthly profit.

Understanding your cash flow is vital! Failing to do so can lead to running out of cash, especially during growth periods. Rapid growth without proper cash flow management can put your business at risk.

Let’s delve into the five key cash flow drivers:

  1. Accounts Receivable (A/R)
  2. Inventory
  3. Assets
  4. Debt
  5. Owner Investment or Distributions

These drivers help you understand why your cash doesn’t equal profit. They can be seen as ‘adjustments’ to net profit.

For instance, imagine a scenario where your business achieved an impressive profit of $100,000 for the month. However, your Accounts Receivable escalated by $16,000, which implies less immediate cash at your disposal. Add to this, you invested in necessary equipment that cost you $10,000, further diminishing your available cash. Lastly, with loan repayments and settling prior debts amounting to $74,000, there’s a significant outflow from your bank account. So even though you made a substantial profit of $100,000, your cash balance surprisingly decreased by $1,736!

This example underscores the importance of effective cash flow management alongside profit generation. It’s one of the many complex financial aspects where a fractional CFO can provide valuable guidance, ensuring your business generates profit and maintains a healthy cash flow. Contact us at J. Denissen CPA and let our Fractional CFO services steer your business toward sustained financial growth. The bottom line is businesses survive and thrive because they manage their cash effectively.

Being profitable is not enough; unless you’re running a simple stand, you must know your cash flow and how to improve it. By understanding these drivers, you can focus on areas to ensure cash is coming in at a rate higher than it’s going out.

At J. Denissen CPA, we offer Fractional CFO services to help you navigate these complexities, providing clarity, control, and confidence in your financial journey.

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