Why Should You Manage Operating Cash Flow?
by Mike J. Agugliaro
You may have built a thriving business, but are you managing your cash flow the right way? It’s the key to making sure that your business stays successful, able to weather slow times, and even to ensuring that it grows.
Your primary cash flow will likely be your operating cash flow. This is, basically, the money that your business generates, that is available to you at any given time. Operating cash flow is what you use to pay your rent, utilities, and other business expenses. It’s also what you use to pay your employees and your own salary, before investing the rest back into equipment, facilities, and other things that will help you grow your business.
Your cash flow should increase as you get more leads and more customers. But as you make more money, and especially once you begin hiring good employees, it becomes crucial to manage that cash flow, to make sure there’s always enough to cover your operating costs. Your profit comes after your operating cash flow.
If you’re looking for investors for your business, it might be more valuable to focus on your operating cash flow rather than your net income. A healthy business typically has a larger cash flow than net income, so if your net income starts rising above your cash flow, it might be time to evaluate the health of your business.
So how do you manage your cash flow? It’s a good idea to prepare in advance. Look ahead as far in advance as you can; focus a week, a month, a quarter, or a year out. Determine how much cash you’ll need to cover expenses in that period of time, and make a projection of how much money you’ll have coming in during the same time. Encourage customers to pay you as quickly as possible for jobs, and figure out when and how you’ll spend each penny that comes into your business. If you have accounts receivable, determine when those will be settled and how you’ll then use that money.
As your business grows, you’ll need to continue reexamining your cash flow. Even if you’ve got more customers or more money coming in, you still need to carefully monitor your expenses versus your income. Keep track of when bills are due, and stick to a good payment schedule.
Another part of managing cash flow involves preparing for lean times. If you’re running a small business, sooner or later you’re going to be short on cash. Don’t wait until that happens to ask for a loan. A bank will be more likely to agree to help you out well before you need the help. Talk to a banker about setting up a line of credit, so you’ll be prepared when the cash isn’t flowing as much as usual.
If you’re an entrepreneur more interested in offering good products or services, cash flow management might not be something you want to deal with. However, poor management of your income can be detrimental to your business, so it’s vital to learn how to do it well. Successful cash management can help you grow your business beyond your wildest dreams.
And that’s not the only secret of business mastery. Contact CEO Warrior today to find out how to unlock more.
Mike Agugliaro, “Business Warrior”
Founder of the Warrior Fast Track Academy and CEO Warrior Circle