Cash flow issues can be a real problem for businesses, especially if you're a B2B company. One way to improve your cash flow is by focusing on your operating margin.
In this blog, we'll discuss what operating cash flow margin is and why it's important for B2B businesses. We'll also cover how to calculate your operating cash flow margin and ways to invest in your business to improve it. Additionally, we will provide invoicing strategies and how invoice factoring can help boost your operating cash flow margin.
Keep reading to learn all about operating margin tips that can benefit your business!
Understanding operating cash flow margin
A key metric used to measure a company's financial health is its operating cash flow margin. A high profitability ratio indicates successful operational activities that generate positive free cash flow. To improve this margin ratio, investing in the business' growth by reducing costs or increasing sales revenue can be beneficial. By monitoring this metric over time through accurate financial statements such as the income statement and statement of cash flows, the business owner can ensure a healthy amount of working capital and earnings quality.
What is operating cash flow margin?
Operating Cash Flow Margin is a financial metric that evaluates the percentage of revenue a company generates from its core operations after accounting for operating expenses. It measures the company's cash-generating ability and efficiency in managing costs. To assess financial health, compare the margin with industry peers and past performance. Improving the margin can be done through cost reduction, inventory optimization, and sales growth strategies.
Why is operating cash flow margin important for B2B businesses?
Operating cash flow margin measures a business's cash generation from its operations. It shows the ability for a B2B to cover expenses and invest in growth. A high margin boosts investor confidence and credit worthiness. To improve it, reduce expenses, increase sales through net terms, and improve efficiency. Regular monitoring helps identify areas for improvement.
Learn more: How to Keep Your Business Cash Flow Running
Calculating cash flow margin
To calculate a business's operating cash flow margin, divide its net income by its total sales revenue.
This metric measures how much money is generated through a company's operating activities, and it is a key indicator of performance.
A high cash flow margin = better earnings quality and liquidity.
A low cash flow margin = more money going out of the business than coming in.
It is important to compare a company’s cash flow margin with industry peers and historical trends to assess its financial health. Regular monitoring can help identify areas for improvement in a business’s strategy.
How to calculate operating cash flow margin for your business
To calculate it, subtract your operating expenses from revenue and divide the result by revenue.
A higher operating cash flow margin indicates better profitability ratios and efficient use of funds. Regularly calculating this metric allows you to make informed decisions about investments in operational leverage and working capital.
Use financial analysis techniques such as:
- free cash flow margin,
- operating cash flow margin formula, or
- negative cash flow margin formula to assess the bottom line of your company's operations.
Investing in your business to improve cash flow
To boost your company's profitability ratio and improve cash flow margin using operating activities consider the following options:
- Investing in technology and automation to streamline processes like Resolve.
- Enhancing customer satisfaction levels that lead to higher net income
- Implementing cost-saving measures such as energy-efficient equipment or negotiating better supplier contracts.
- Diversifying your product or service offerings which can increase your business's cash flow margin ratio by generating more sales revenue from new markets.
How investing in your business can improve your operating cash flow margin
Improving the profitability ratio of your business is critical to boosting its cash flow and operating activities. Enhance customer satisfaction by streamlining processes while also cutting down on overhead and variable costs. Seek out guidance from experts on how to diversify your product portfolio while improving operational leverage and earnings quality through investing in new technology or equipment. Regularly calculating cash flow ratios such as free cash flow margin and operating cash flow margin represents a key indicator of performance for businesses looking to grow their total revenue.
Invoicing strategies for better cash flow
To optimize your business’s cash flow, it is crucial to implement effective invoicing strategies such as -
- Sending invoices promptly and consistently to ensure timely payments from customers.
- Offering incentives for early payments or charging penalties for late payments.
- Using online invoicing software can streamline the process.
- Clearly communicating payment terms (i.e. net terms) and following up on overdue invoices to avoid cash flow gaps.
- Re-evaluating your pricing strategy to find ways to improve cash flow without compromising profit margins.
Learn More: Tern Bicycles Increased Sales Orders with Better B2B Payment Workflows.
Accelerating cash flow with net terms financing
Accelerating your business's cash flow can be made possible through net terms financing. What are net terms? Net terms are deferred payment terms offered to customers who are seeking extended periods of time to pay for their goods or services.
These terms mandate how long a customer has to make a payment upon receipt of an invoice. For example, a net 30 invoice indicates that a customer has 30 days to settle their payment.
Net terms financing helps you avoid the detrimental effects of negative cash flow margins while improving your company's net sales and earnings quality. By outsourcing accounts receivable management, you can save time and resources on business operations while improving your net profit.
Read: The Pros and Cons of Offering Net Terms Financing
Next steps?! Increase cash flow
Understanding what operating cash flow margin is and how to calculate it is essential for businesses that want to optimize their financial performance. Investing in your business, optimizing invoicing strategies, and considering net terms financing are all ways to improve your operating cash flow margin.
Resolve can help you boost your cash flow through net terms financing. Learn more about how we grow B2B sales and how we can ultimately help you improve your operating cash flow margin.
