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Why Operating Cash Flow Is King | Cash Flows | Staples | Business Hub |®

Why Operating Cash Flow Is King

by Mike Plotnick, Staples® Contributing Writer

When Vivian Volz launched VVAS, her San Francisco-based architectural specifications business, in 2009, she set up a straightforward billing process. She simply invoiced clients after she completed each phase of a project and moved on to the next phase. What she didn’t consider, however, was how that process would impact her operating cash flow, or the amount of cash generated by the company’s normal business operations. Because most of Volz’s architectural-firm clients paid her only after receiving payment from their clients, she had a lot of past-due accounts.

“By the time I got paid, it was long after I actually did the work,” says Volz. “As a small business, that model was really not sustainable.”

After consulting with her clients, Volz discovered she could shave weeks off her receivables by aligning her billing cycle with theirs.

“Sometimes I still feel like Charlie Brown waiting by the mailbox on Valentine’s Day,” she says. “But it’s not like I’m waiting for a check so that I can go to the grocery store. There’s enough of a rhythm and a flow that I can manage my business and household expenses.”

As the Cash Flows

Because operating cash flow reflects the amount of money available within a business at any given time, it provides a clear picture of the business’s operational health.

“The cash you have in the bank doesn’t necessarily reflect the actual performance of your business,” says Beth Whitworth, CPA, president of Accounting Solutions Group in St. Louis, MO. “You have to look at broader operational activities: ongoing expenses, payment of vendors and staff, billing of customers, and any financing activities such as a loan repayment.”

Cash flows become even more important as a business grows and needs to purchase additional inventory or office supplies while paying staff and vendors. Having cash readily available also enables the business to consider potential expansion opportunities.

“Early-stage or growing businesses frequently underestimate the amount of working capital necessary to support the growth of the company,” says Bob Cockrell, CPA, senior vice president of commercial banking at Montgomery Bank in Chesterfield, MO.

A cash flow statement is one of the primary tools to show the sources of a company’s cash and how that cash was spent over a specified time period. “From a banker’s perspective, a cash flow statement is the most important of the financial statements available,” Cockrell says. “It’s one of the key aspects we use in evaluating a potential borrower and gives us a comfort level that a business owner is able to make payments.”

Economic Slowdown

The economy often has a significant impact on operating cash flow, as customers or clients adapt to their own economic realities.

“Businesses tend to slow down payments during a slow economy, and that affects everyone in the chain,” Cockrell says. “Many businesses suffer mightily or fail because their customers have less money, buy less or pay more slowly.”

To help facilitate quicker payments and improve cash flows, Whitworth says many businesses encourage customers to use credit cards, ACH payments or electronic invoices that include a link to pay online. “There’s no mailing and no checks to be deposited,” she says. “It’s an effective way for small businesses to help support cash flow.”

It works for Greg Squires, president of The PetCot Company in O’Fallon, MO. He urges consumer and business-to-business customers to pay upfront with credit cards when they purchase the company’s elevated dog beds and accessories.

“Some of our larger customers still pay with checks, but we prefer credit card payments so we’re not financing companies whose terms may be 60 or 90 days,” he says. “You get the funds deposited into your account the next day, so you don’t have to worry about getting paid.”

But sometimes advance payment isn’t feasible or ideal for a business.

“We have the option of billing our customers upfront but choose to bill after a project is complete,” says Ron Braatz, president and owner of LiftOff, an IT consulting and training company based in Crofton, MD. “Customer satisfaction is our top priority. We want our customers to experience our services and training before paying, which slows down our cash flow quite a bit. It’s not uncommon for some invoices to age four to six months before we receive payment.”

This doesn’t have to be a problem if you understand your key financial ratios and have enough cash on hand to cover expenses and payments.

When all’s said and done, operating cash flow is a key factor in a firm’s long-term viability. “Cash flow is the lifeblood of a small business,” Whitworth says. “It could be the difference between staying in business for a year and staying in business indefinitely.”


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