When talking cash flow, I can’t help but think it’s a math equation. That’s why many people don’t do it, because there are many moving pieces to the formula. Why do you need to manage your cash flow? It’s simple really, yet I find a mere one out of 100 contractors really know how to manage cash flow. In order to hire, invest or grow your business, you need positive cash flow.
So how do you manage cash flow? Like I said, it’s simple when you follow this principle: “Don’t spend more than you have.” This goes for you personally and for your business.
The more important question might be: “How do you know if you have a sustainable, positive cash flow?” It’s a simple math calculation. However, knowing which numbers to look at might not be as simple. I use what is sometimes called a quick ratio, and the interpretation for acceptable aging for accounts receivable can differ by industry groups. The equation I use is below, and to learn more about how to use it, click here for my most recent column in P&M Magazine.