Council Post: 15 Essential Factors To Consider When Analyzing Operational Cash Flow

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Keeping a tight focus on finances is a core responsibility of a business leader. Of particular importance is a company’s operational cash flow, or the amount of cash generated by standard business activities within a fixed period. With an accurate view of their company’s OCF, leaders can make better informed decisions about needed operational adjustments and future plans. But an accurate and informative OCF analysis entails more than adding up a list of numbers; it’s also essential to adjust for a number of variables.

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With the company’s financial health in their hands, leaders should have a firm understanding of how to accurately analyze OCF and use that information to improve operations. Here, a panel of Forbes Finance Council experts shares 15 essential factors that can help entrepreneurs and financial leaders successfully and accurately analyze their company’s operational cash flow.

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1. Whether You’re Using The Best Tool

Forecasting operational cash flow is the most significant skill a business leader can have, as nothing else matters if a company can’t pay its bills. There are various acceptable ways to determine operational cash flow, but all are complicated, and all allow for mistakes. First, undertake due diligence and then select a cash flow forecasting tool, of which there are many on the market. , Khalid Parekh, FAIR Bank

2. Cash Flow Versus Revenue

Business leaders need to understand the difference between cash flow and revenue. Cash flow measures the liquidity or financial health of your business and is essential to keep the doors open. Cash is what you have left at the end of the day—it can be positive or negative. It’s also what allows you to reinvest in your company (or not). Revenue is a measure of sales and marketing. , Jared Weitz, United Capital Source Inc.


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3. Your Operating, Investing And Financing Activities

Ensure you have all the data necessary to paint an accurate picture of your business. Having a working knowledge of your operating, investing and financing activities (and not leaving out the smallest bit of information) is a must. , Antoine Sallis, Pacc 10 Enterprise

4. Your Business’ Tax Obligations

Paying taxes is an obligation of running a business, yet there are companies today that still struggle to efficiently manage their tax payments. Issues stemming from filing errors and missed deadlines result in penalties and added interest, both of which will inevitably put a drain on your business’ operational cash flow. Actively monitor your business’ tax obligations to avoid issues later on. , Mara Garcia, Phonexa Holdings, LLC

5. Your Workforce Needs

Some tasks can already be completed by one person. It might be wiser and more cost-effective to let go of the positions that are no longer needed and pay those who will take over the tasks left by those you let go. Consider hiring virtual assistants, as this allows you to save money on space rentals and power. , Neil Anders, Trusted Rate, Inc.

6. The Costs Of Lending Arrangements

Leaders should understand the costs of lending arrangements and the deductibility of their interest payments, should a business be operating on leverage. With interest rates increasing, carrying debt in the current environment is a factor that will shift the available operational cash flow. Ensuring the cost of debt still provides underlying value based on the investment opportunity it provides is fundamental. , Daniel Kachani, Aria Wealth Solutions

7. Changes In The Balance Sheet And Cash Flow Statement

Managers sometimes focus too much on the income statement while ignoring the company’s other financials. This is especially true when tracking accruals, prepaids and non-cash items such as amortization and depreciation. While the P&L is a great indicator of a company’s operational performance, it does not include cash management. Remember to watch changes in the balance sheet and cash flow statement. , Glenn Hopper, Sandline Global

8. Cash Flow Timing

It’s easy to get into a situation where you have a mistiming of a large cash outflow without a subsequent inflow. For example, you may have to pay for your inventory before you can sell it. Knowing your cash flow timing and ensuring you have available funds will prevent your having to pay for costly short-term loans. , Aaron Spool, Eventus Advisory Group, LLC

9. Historical Data

I believe the primary reason to analyze operational cash flow is to see how your actual spend aligns with your planned spend. It’s the unplanned expenditures that usually hurt. Your historical data can show you where you spent more than planned. If you can identify your top ten unplanned expenditures from the past, you can probably reduce unhappy surprises in the future. , Todd Sixt, Strait & Sound Wealth Management LLC

10. Turnaround Times On Accounts Receivable

Having an accurate representation of the turnaround time on accounts receivable is essential. If you’re creating budgets or financial statements based on the assumption that your accounts are receivable within a particular window but they’re actually taking weeks or months longer, it can create myriad issues. , Justin Goodbread, WealthSource Partners, LLC

11. Gross Profit Margin

Healthy gross profit margins generally equate to fewer cash flow problems and allow for total sales to cover direct costs, variable costs and fixed costs. Closely tracking operational cash flow empowers organizations to reallocate funds to areas critical to growth. , Mike Whitmire, FloQast

12. Income Versus Expenses

It’s an old adage, but it’s still so true: Cash is king. Income versus expenses both today and forecasted over the next six months is an essential factor, especially if a business experiences seasonal changes. Cash in versus cash out is important, especially now as worries about inflation and recession are causing business leaders to reassess their monthly burn rate. , Renee Fry, Gentreo, Inc.

13. Cash Balance Trends

Communicate cash balances to leadership and address trends as a team. Have accounting develop a 13-week rolling cash forecast that is updated and socialized weekly. Eliminate spending on superfluous costs, monitor inventory and reduce/remove billing errors and billing delays that lead to lagging cash receipts. Step by step, you can wield cash well. , Matthew Goldston, PKF Texas

14. Gross Profit Margin; Debt Versus Equity

Most business owners can quickly recall their revenues, sales and how much cash is in the bank. This is like knowing how much money is in the ATM; it’s not at all an indication of the health or vitality of the business. The gross profit margin and debt versus equity are essential indicators that your company’s leadership should be tracking to analyze the business’ longevity. , Leslie Heimer, American Liberty Mortgage | stockworth

15. Speed ​​Of Invoicing

With many companies still allowing remote work and “normal” mailrooms for incoming invoices not being staffed, it is essential that your ERP/accounting systems can send automated invoices via email. In addition to this verifiable delivery method, EDI and other automated invoicing systems are key to enabling your customers to perform the “match.” , Jeff Snow, PAC Worldwide

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Credit: www.forbes.com /

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