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Understanding the Moving Parts of Positive Cash Flow

Posted by Seth Herman on Fri, Apr 28, 2017 @ 01:11 PM

Understanding the moving parts of cash flow and measuring the proper metrics can ensure that your cash flow stays positive.Most businesspeople have a rough idea of the moving parts of cash flow, but it’s vital for business leaders to understand how to gauge cash flow accurately. Several operational expenses can easily go unnoticed, such as inconsistent contracts with service technicians or similar expenses. For new business owners, these expenses quickly become overwhelming. However, using the correct metrics can ensure that you are aware of your cash flow, and that your cash flow is trending in the positive.

What Exactly is Operating Cash Flow?

Some business owners think cash flow is interchangeable with net income, or earnings before interest, tax depreciation, and amortization (EBITDA). Operating cash flow, or OCF, refers strictly to the amount of cash generated from your company’s everyday business operations. It is not your net income, but a cash version of net income. The amount of OCF you have lets you know how much your business can expect to grow in say, one month, six months, or a year. It tells you how much money you can safely funnel into business growth, and which of your business’ areas need the most attention.

Must-Have Cash Flow Metrics

To properly calculate and analyze cash flow, you need the correct metrics. There is a plethora of metrics options; the word “metrics” simply refers to the tools business owners use to determine operating cash flow, service output, employee satisfaction, etc. Most business owners choose their cash flow metrics based on criteria like the resources they have for obtaining cash and the cost obtaining a certain amount of cash will incur.

When determining your company’s cash flow, consider using metrics like EBITDA or earnings per share. Use company-specific metrics where appropriate. If you are an oil company, much of your operating cash flow will come from the cost per barrel of oil you sell to each of your buyers. Before choosing metrics, determine your cash flow cycle. The cycle may change, so remain prepared to adjust metrics accordingly.

Managing Surprise Expenses

No matter how well you manage your cash flow, surprise expenses will come up at some point. They are not a major blow if you are prepared for them. Regularly set up a cash flow forecast, perhaps every 60-90 days. Within that forecast, prepare as much as you can for emergencies. Will it be harder to pay bills this month because you recently bought a new piece of equipment? Build in a financial cushion to avoid spending too much on everyday expenses. Is a certain product no longer selling well? Adjust your budget so your business no longer depends so heavily on its cash flow.

If short-term cash flow is an ongoing problem, you might consider measures such as invoice factoring. The professionals at financing or factoring companies can not only alleviate your cash problems, but show you how to strike a consistent balance between what your business spends and earns. Bay View Funding has been helping businesses in all industries manage their cash flow since 1985. Contact Bay View Funding for more information today.

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Topics: Cash Flow, Cash Flow management, Cash reserves, Cash Flow Metrics, EBITDA

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