Cash Is King: Determining Your Cashflow


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Customers are calling, your crew is busy, the money is rolling in and you’re paying your bills.

That means your business is flourishing, right? Maybe.

The only way to determine if your company is truly healthy is to look at your operating cash flow. This figure, which is the amount of cash your company has on hand after all expenses have been paid and accounted for, gives an accurate indication of the economic state of your business and can predict its future success or failure.

“What’s happening with your cash shows how your company is really doing,” says Gregg Wind, CPA, a partner in Wind & Stern LLP, who provides tax assistance and advises small and medium-sized businesses. “If your operating cash is in the negative, that’s a sign that perhaps your expenses are too high or you’re not bringing in enough revenue.”

Importance of operating cash flow

Taking a close look at your operating cash flow is definitely worth your time. “Your operating cash flow is a telling number,” says Wind. “As a matter of fact, operating cash flow is so important that in 1987, the Financial Accounting Standards Board (FASB) began requiring that a statement of cash flows be a regular part of basic financial statements. Operating cash flow is important information for investors and lenders, because it gives them a good idea if you’re able to meet your financial obligations, handle cash well and finance growth.”

How To Calculate Operating Cash Flow

Operating cash flow is determined by subtracting your operating expenses from the money generated by your company providing HVAC service. When calculating, you add depreciation to your net income and make adjustments for working capital like inventory and accounts receivable. Operating cash flow is essentially the cash portion of your net income, and it is recorded on your quarterly and annual cash flow statements.

Operating Cash Flow VS. Net Income

So why not just focus on net income? The fact is investors and lenders prefer analyzing your operating cash flow for a number of reasons. “Because your operating cash flow is adjusted for depreciation, receivables and liabilities, that process essentially squeezes out all of the cash that is coming in and going out of your company,” says Wind. “On the other hand, your net income report could show positive earnings after the sale of an HVAC system you had in inventory, but no cash has yet come in. The net income makes the company look more profitable than it actually is, whereas the operating cash flow shows the true picture.”

Investors and creditors will also often compare operating cash flow to net income to see if any manipulative accounting techniques have been used. For instance, if you’re reporting high earnings but are low on cash, this indicates that something is amiss—especially if this scenario occurs over several quarters.

On the positive end of the spectrum, if your operating cash flow is actually higher than your net income, this could signify that your company has more cash than indicated on the net income statement and is actually healthier than the numbers reflect. In this case, it is in your best interest to highlight your operating cash flow.

What if Your Operating Cash Flow is Negative?

If your operating cash flow is low or in the negative, this could shine a light on a particular problem with the operation of your business that you can work to resolve.

“Negative operating cash flow could be a sign that your expenses are too high and you need to either lower them or raise revenue,” says Wind. “It may also indicate that you’re not achieving the results for which you budgeted and that your budget requires adjusting. For instance, if you budgeted to pay a certain amount for rental equipment and the costs went up during the year, this will throw off your budget, as will one of your big clients paying slower than they used to.”

Sometimes the solutions to cash flow troubles are simple ones. “In the case of the client that is now paying slower, it may just mean offsetting this lag by holding payments to your vendors and creditors for longer,” says Wind. “You could pay those bills you owe net 30 closer to the due date than you have been paying them.”

It’s also important to keep in mind that a negative cash flow doesn’t always indicate that your company is struggling. For example, if you’re expanding your business or if you’ve purchased a large amount of HVAC systems, a cash flow statement may show a negative figure. A comparison to prior cash flow statements will illustrate that this is a temporary condition for your business.

Benefits of Positive Cash Flow

Besides the fact that a positive cash flow allows you to pay your bills and weather setbacks, such as late payments and increased operating costs, a healthy operating fund offers the ability to expand your business and take advantage of financial incentives.

“Cash on hand gives you the opportunity to take advantage of vendor discounts and those excellent deals you can often get when you pay cash rather than finance items such as new equipment,” says Wind. “Or you can do something crazy, like take a bonus. Having a positive cash flow gives you options.”

Julie Bawden-Davis
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Posted In: Money

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