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Why would an increase in sales result in a decrease in cash flow?
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6 Answers
The most common cause for an increase in sales to result in a decrease in cash flow would be long AR terms. However, this is usually financeable to some extent. You could also go to some of your customers and offer them a discount for quicker payment which should alleviate your cash flow problem.
The first place to look would be at 'what is driving the increase in sales'. A couple of areas are:
If the volume increase is due to reduced price per item, then unless the volume increases faster than the price decreases then your net revenue can go down. This would reduce cashflow.
Alternatively, if the sales increase is coming from new or extended business, then if the terms associated with these sales are worse (longer payment terms etc) your cashflow generation can fall (although it should be short term).
I agree with Jeremy, it is probably due to increased sales through long-term A/R. This can be avoided though through receivable financing/factoring. Feel free to contact me directly if you would like to discuss further.
Eric Schoep
Marketing Director
Conrad Companies
http://www.conradco.com
http://www.facebook.com/conradco
An increase in sales may cause a decrease in cash flow if those sales are booked as revenue but the actual invoice collection period extends beyond the normal terms. It is important to be able to project both sales and cash flow when you are seeking to grow sales.
The simple answer to this is called "The Working Capital Cycle" which is the time lag between when a business starts to spend cash on fulfilling an order and eventually collects the cash from the customer. In a manufacturing business it can last up to 180 days or longer.
Ways around the problem include getting a deposit from the customer, getting extra credit from your suppliers or negotiating retainers.
The reason for this could be several items:
1) your A/R average days outstanding may have increased
2) your cost of sales may have increased, which in turn lowers your gross profit margin unless you increased your pricing
3) did you lower your selling price to increase volume
4) have you had to get current on outstanding payables or other debt that you have been late on, and therefore your cash flow has increased but it was offset by the reduction in payables and other debt
5) has the numbe rof times your inventory turns over decreased during the year.
All of these things play a factor
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