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Operating cash flow is a means of tracking all of the money flowing inwards and outwards for the goods and services of a business. Cash is the life force of a business. Poor circulation can cause fatal circumstances. Ideally, we all enjoy business when it is healthy. A healthy company is one that makes more money than it is spending, while its goods and services are in high demand from the consumers, and a strong stride of growth is afoot.

So, you might consider your own startup business. Rather, you might look to focus in and become more attentive or aware of what's going on with your current business. Maybe, you're into investing and want a better idea of how organized and on top of things a prospect company is. An operational cash flow is a great answer for enhancing the approach of these above circumstances.

What is Operating Cash Flow?

Operating Cash Flow

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Operating cash flow is literally the cash flow from operating a business. If you are in the business of selling and installing mirrors and you get a call, show up to a scene, install a mirror, and get paid for it, then that scenario with all of its expenses and incomes will be considered “operating” cash flow. Now, if you are that same mirror business and have equipment in your office you sell, that income is not operational, it is separate from the actual business operation, and therefore not part of operating cash flow.

The same thing goes for investors or financiers. If someone, whether a person or the bank, will invest fifty thousand dollars in your mirror company, that's fantastic, but will not be recorded and considered as part of “operating” cash flow, which leads us to our next point.

Cash flow is another terminology for business documentation. They break a company's overall cash flow down into three regions: Operating, Investing, and Financing. Operating cash flow is a portion of the overall umbrella they call “cash flow.”

So, going back to the examples from above, if you are a mirror company, and selling office appliances or furniture, you will record the money earned in the section investing, instead of with operating cash flow. And the financing or investments from other willing investors towards your business will go into the Financing records, again, rather than in operating cash flow.

The point of all this is because when comparing multiple companies, their overall cash flow (which is a combination of operating, investing, and financing) can read better for one and worse for another, but they do not speak regarding a business' fundamental operations. How a business can move its actual goods and services and generate a positive inflow, in contrast to its outward expenses, for inventory, services, and employee payouts, is a valuable resource all in its own right. That is the meat of how a business functions. They consider it a clearer picture of a more current reality for a business. Therefore, it branches off and stands in its own right.

Not to be confused with net income, cash flow is different but similar at the same time. Cash flow will take into consideration the money available to a business. It is a big picture view that encompasses net income. Net income is a measurement of the profits a company made in a period. Cash flow takes into consideration working capital on top of net-income and some other factors like amortization (allocating costs of intangible assets over time), and deductions (the devaluation of assets.

If equipment is purchased for a business at $10,000 and it depreciates at about $1,000 a year, then the company is technically responsible for those expenses.). Taking “working capital” into consideration there is a more current calculation of assets and liabilities for a company. While net income is set for a period, based on gross income, operational costs, and then taxes and such.

Operating cash flow, however, leaves all those concepts and approaches out and it focuses primarily on the cash flow inwards and outwards as a business exchanges its goods and services for money from consumers.

Why is Operating Cash Flow important?

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Operating cash flow keeps track of money going in, and money going out, in real time. If there is an account payable invoiced in January but isn't paid to you until May, then the money coming in is not recorded until May. Conversely, if Money expensed in January doesn't get paid off until April than the charge to your account does not accrue until April.

Having a healthy business is having a healthy operating cash flow. If growth is in mind and your business is unorganized with operating cash flow, creditors will probably turn you down. They are making an investment and are leery about where their money is going. You show positive, operating monthly cash flow, month after month, and then grounds for trust will emerge and so will the likelihood of obtaining credit that can grow your business beyond its current state.

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Keeping a record of an operating cash flow keeps you aware of business expenses and business profits for a periods time. Let's say you make $70,000 in one month and your liabilities of employees and inventory is at $60,000. For whatever reason, a client on your accounts receivable doesn't come through in a period. You now are 15,000 short on that 70,000 you thought you made. Your assets for the month are lower than your liabilities - only $55,000 made and $60,000 spent.

Anxiety sets in. It might not be a reoccurring experience, but it is realistic. Working with an operational cash flow gives you this bird's-eye view of everything, and with that bird's-eye view you can see that that may happen and maintain what is known as a cushion account. Equivalent to one period of employee payroll is usually a safe bet. Now, in such an experience you are prepared and divert the negative cash flow numbers until they are paid by accounts receivable. Operational cash flow makes you so much more conscious as a business owner.

Provide Information on How to Use Operating Cash Flow

Provide Information on How to Use Operating Cash Flow

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Keep a documented record and conscious approach to relationships with other businesses. Most B2B (Business to Business) businesses suffer the late payments for goods or services.

As a business you will rely on the cash flow coming in every period, to counteract the expenses and operating costs. Looking at your cash flow, you can get a good idea of what monies are coming in and what monies are going out. Big clients of your accounts receivable may end up paying you late. Therefore, that expected cash flow inward never materializes for the period, and they leave you in a distressed space and place because now your business may be in the red. That can be really damaging to a business if unaware of the dynamic.

A well attended to Operating Cash Flow can keep you engaged to who owes what and how that affects your overall cash flow. That engagement can also lead to a more attentive approach to collecting monies owed from accounts receivables. Businesses that are paying late can be given 30, 45, and 60-day reminders of non-payment. You can even issue late penalties, and or discounts for clients that pay early. It's a huge plus with B2B interactions to stay aware and attentive with Operational Cash Flows.

Get a good idea of where your money is going, and whether or not you are spending it on the wrong things.

If purchases are being made that just ultimately hurt your business, then it will show up on a cash flow. You will see your expenses and their relativity to your businesses success. That insight can do a lot for you as you dedicate to growth, sustainability, and success in being a healthy business. They keep the money organized.

Taxes can come out of nowhere. You're a business owner, not necessarily an accountant or tax professional.

Money earned can be quickly lost when paying taxes if you are not attentive to what expenses are involved. Many people just wait until April time, where they then owe a huge amount, cut the check, and are suddenly left jaw dropped looking at the business bank account. Taxes can be unexpected and throw everything array. Instead, to create a separate bank account, and pay those taxes off on a more incrementally regular basis, with monthly payments, can help you better allocate those expenses.

Then, they get added to the operating cash flow spreadsheets, and you can rest assured, knowing surprise numbers will not come flying at you, damaging all the positive profits you've spent however long building.


You have business to attend to, and you want to be smart about it, well, be smart about it. An operational cash flow record, as you can see will take your awareness of your business to the next level, secure your functionality, organize you, and draw you into making moves on a smarter level for that smarter business you seek.

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