4 Rules of Operating Cash Flow

1. Operating Cash Flow should be positive.

Negative Operating Cash Flow means the business is losing cash from the operations of the business. Negative Operating Cash Flow means the sustainability of the business is in jeopardy because the business is paying its bills by:

  • Dipping into savings.
  • Selling assets like a vehicle or computer.
  • Raising money from a third party, like a bank or an investor.

2. Operating Cash Flow should be greater than profits.
On an income statement, not all expenses are cash. Depreciation and amortization are examples of expenses which reduce profits but never have an impact on cash. Therefore, if your business has depreciation and/or amortization expenses, your profits should be smaller than your Operating Cash Flow. If Operating Cash Flow is smaller than your profits, check the balance sheet for:

  • Ballooning accounts receivable or other current assets.
  • Escalating inventory balances.
  • A sharp decrease in accounts payable or other current liabilities.

3. Operating Cash Flow should be moving in the same direction as profits.
If profits are going up, Operating Cash Flow should also be going up. Not only that, in a well-run business, Operating Cash Flow will be increasing at a fast or higher percentage rate than profits is increasing. A business that makes less and less on more and more will eventually go broke. 

4. Operating Cash Flow is bigger than Investing cash needs.
A business whose Operating Cash Flow is greater than it’s Investing Cash requirement is self-sufficient and does not have to rely on the generosity of strangers, which is third party financing called bankers and investors.
The optics you will receive and the train wrecks you will avoid by paying very close attention to these 4 Operating Cash Flow rules are worth their weight in gold.

4 Rules of Operating Cash Flow – Keith J. Cunningham – Keys to the Vault