Strong Sales Does Not Mean Strong Cash Flow

Strong Sales Does Not Mean Strong Cash Flow

Be Sociable, Share! Tweet When I was a young MBA student, one of my professors had a saying that has stuck with me ever since. “You can live without sales, you cannot live without cash flow” he used to say. This saying has been proven again and again to me in the course of my career as executive and as a commercial banker. Most of my commercial customers who sought lines of credit were doing so to cover cash flow issues they were having. Some were experiencing rapid growth and needed the short term borrowing to purchase inventory or finance work ahead of payment. From time to time however, I found myself in front of a customer that had severe cash flow issues that were not associated with rapid growth. Finding the Cash Flow Problem One particular case was intriguing for a number of reasons that highlight both the need for short term borrowing for cash flow issues, and how that very borrowing can delay the company in confronting the underlying cause of the cash flow issue at hand. In this particular case, the company was experiencing very slow payment on its accounts receivable. Normally in such a case, the bank calculates an average collection ratio. This is calculated on an annual basis by taking the accounts receivable divided by (total sales/365). The shorter the number of days, the more quickly the company is collecting payment on its A/R. And of course the quicker the collection the better the cash flow. For this particular company, the average collection was over 90 days. Some accounts were in excess of 365 days....
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