Sales – A Source and Use of Cash
For example, an increase in sales may be a source of cash, but it can also use cash.
Typically, most businesses need to spend cash before they generate sales. This “sunk cost” takes cash out of your “cash bucket”.
The lag between when a sale occurs and the sunk cost of achieving it can lead to the use of cash.
This is the reason why that when a business experiences a growth surge, it can be profitable, but not have enough cash.
Gross Margin – A Source and Use of Cash
An increase in Gross Margin (sales less cost of goods sold as a percentage of sales) can be a source of cash.
An improved Gross Margin may be achieved through increased pricing, better buying or less cost of manufacture, etc.
Conversely, if the Cost of Goods Sold increases, it will reduce the Gross Margin and take money out of the “cash bucket” (use cash).
Trade Debtors – A Source and Use of Cash
If customers are given time to pay via trade terms, this is a use of cash.
(Providing time to pay doesn’t take cash out of the “cash bucket,” but the need to fund the business until payment is received from the customer does)
When the monies are received from the customer, this is a source of cash.
Money tied up in outstanding debtors is a very common reason a business can be profitable and not have enough cash.
Trade Creditors – A Source and Use of Cash
On the flip side, if suppliers to a business provide terms to pay, this can be a source of cash.
But when we pay the creditor, that is the use of cash.
(Again, like debtors, creditors don’t provide actual cash, but they allow a business to avoid using their own cash resources for a period of time)
Stock – A Source and Use of Cash
Stock is another example, if we increase our stockholding, that is a use the cash however, if we sell the stock, that is a source of cash.
Over investment in stock is another common reason a business can be profitable and not have enough cash.
Assets – A Source and Use of Cash
Similarly, investing in some form of asset (say new equipment) is a use of cash.
If an asset is sold, that is a source of cash.