When it comes to handling your business’ cash flow, it’s hard to know which advice to follow. So many different approaches can muddle the clear picture and vastly downplay the difficulties of gaining control of your finances. But we found some of our favorite pieces of advice on the website Investopedia that’s both easy to understand and easy to implement on your own.
So what’s this great advice? Separate and compartmentalize your finances into three separate cash flow categories: operational, investing and financing. By organizing your cash flow, you ensure that all areas of your business are being taken care of. Here’s a closer look as to what these compartments mean for your business.
Operating Cash Flow – When separating your finances, the first group you should prioritize is your day-to-day operations. Your building lease, electricity, payroll – these need to be taken care of first. They may not seem like very important necessities in the larger picture, but without functioning internet or satisfied employees, your company wouldn’t even be able to get off the ground.
Investing Cash Flow – After you’ve ensured that your lights will stay on and your employees paid, the next level of finances you should be eyeing are your investments. Building up your long-term assets will assure that your business has a future to look forward to.
Financing Cash Flow – Now that you’ve secured your day-to-day bills and finances for the future, you should now begin to split up your remaining cash flow and pay back your creditors. Most organizations are content to know you haven’t forgotten about your debts, so don’t panic if you can’t pay them back in full right away.
After all three channels have been taken care of and you still have money left over, you’ll then be in a rare but achievable state of business: liquid assets. Treat yourself and pay off a debt completely, invest in new and promising stock, or even give your company a bonus as a reward for all their hard work.
David Chase, Managing Partner at Advanced CFO, has experience in small to medium private companies and large public companies as a senior operational and financial leader. With 17 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience. Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.
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