Drivers of cash flow
The drivers of cash flow are the components of a business evaluation model that drive a company’s cash flows. These components help financial analysts forecast a company’s future cash flow and build a predictive valuation of a company. The following are the drivers of cash flow:
Revenue
Gross Margins
EBIT (DA) Margins
Working Capital
Capital Expenditure
Capital Structure
Accounts Payable
Accounts Receivable
Revenue Growth
Selling, General and Administrative Expense
Cost of goods
Expenses
Accounts receivable days
Inventory days
Accounts payable days
Analyzing the cash flow drivers can help build a predictive valuation of a company. If your cash flow drivers are not carefully analyzed, it can lead to an erroneous predictive models and poor decision-making by management. Understanding your own cash flow drivers and comparing them to industry and peer metrics will help you with better decision-making.
For example, the average gross margin for all US industries is 41.6%. Here are the average gross margins for specific industries:
Advertising: 26.2%
Apparel: 53.04%
Banks: 99.3%
Construction/Engineering: 13.45%
Financial services: 85.08%
Hospitals/Healthcare: 36.78%
Real Estate: 28.92%
By analyzing the average for your industry, and then comparing that to your own business and to your peers, you can determine which of the cash flow drivers you need to focus on.