Dell Technologies


By James Pruitt – Senior Staff Writer

Small businesses certainly need on-hand cash, and lots of it. A new business owner needs at least enough to cover any kinds of emergency costs, or unexpected costs, even on an everyday basis. But what happens when too much of a business’s assets remain as static, inert cash? Money should make money if not working further in other ways towards the business’s goals.

Small businesses can in fact have too much cash on hand. That cash should work for the business rather than lay stagnant in bank accounts. However, the art of cash flow management is very challenging and eludes many business owners.

The concept of return on assets can help a determination of whether standing cash does or does not work for the business. Return on assets simply asks the question of whether a business’s money or resources could better work somewhere else?   If the answer is negative, perhaps the owner should consider a diversification of the company’s portfolio. Business owners should consider and make such a determination once or twice a year.

What alternatives might diversify a company’s portfolio? Perhaps the redeployment of existing monies could better serve the company. Few metrics in business have greater importance than return on assets. Assuming a pool of cash stagnates in a forgotten bank account, what alternatives can revitalize that rotting pond? Many alternatives can diversify these assets. Among these are bonds, healthy stocks, and CDs.

Depending on the nature of your company and the legal considerations, the best option may be removal of funds to your personal retirement account or your kids’ college account. Consider whether legal considerations restrict your company from intermingling personal from business funds (such as partnership or incorporation situations). However, such options should be readily available to small business and home businesses.

Frequently recommended is six months of “operating cash” for your business. “Operating cash” generally means cash necessary for basic expenses such as recurring labor, utilities, rent, and recurring purchases. Assuming such cash in the coffers, owners may benefit in three ways.

First, standing operating cash backs up any outside negotiations. Business decisions should start from a position of strength. The toxic scent of desperation poisons business deals. Vendors, partners, and suppliers often smell this scent before the owners themselves. Owners should always maintain some wiggle room for negotiation. The best deals do not happen when the owner needs something tomorrow. Having six months of cash flow on-hand relieves the urgency of this type of tension.  Decisions under excessive stress rarely provide the absolute best outcomes.

Second, the past ten or fifteen years warns of the inevitable ebb and flow of the economy. Always assume dry spots. Six months of on-hand cash may guide your business through those straits. Just as individuals should keep personal emergency funds, businesses should keep that six months of operating cash for economic emergencies. Small businesses especially will not regret it.   The current pandemic has changed all of the dynamics and rules.

Third, consider the development of your company. Much can happen in six months. Your business plan may change, you may get new ideas, you may discover new opportunities. A six-month supply may allow owners to redirect their business ventures, and see new ideas come to fruition.

On-hand cash flow is important. Businesses should always have emergency funds. However, stagnant cash does small businesses no favors. Options are limitless for secure management of unused cash. Whether through investments, lucrative deals, or new ideas, business owners should stream those monies out of that stagnant pond, assuming the money does not work for the company in situ. As always, balance is the key.

VAMBOA, the Veterans and Military Business Owners Association, hopes that you have enjoyed these articles addressing various aspects of Cash Flow.   We work very hard to bring our audience timely and valuable information.

VAMBOA does not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.

Varieties of Cash Flows

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By Debbie Gregory.

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Cash flows in and flows out. Cash flow is important and is a key indicator of a company’s health. As discussed in the previous article, cash flow is different from profitability. Cash flow measures the liquid assets on hand, while profitability relates more to the long-term expansion of the company.

Different types of income and expenses break into different categories of cash flow. We can break these down into (1) “operating cash flow,” (2) “investing cash flow,” (3) “financing cash flow,” and (4) “other cash flow.”

Differentiating types of cash flow helps businesses create a cash flow statement. These statements are important both for internal accounting and tax purposes. Each type of cash flow may require its own equation for records maintenance. These records are important for any company’s operations procedures, regardless of the company’s size.

  • Operating Cash Flow

“Operating cash flow” comes from a variety of sources. On the incoming side of the equation, “operating cash flow” might include the direct cash revenue from goods or services is one such source. Outgoing cash flow might be employees’ wages, purchase of supplies or equipment, utility bills, overhead, or payments on loans. Other types of operating cash flow, besides direct revenue, may include interest on loans and payments from lawsuits. The most common formula for “operating cash flow” is the following: Net Income + non-cash expenses + changes in working capital.

  • Investing Cash Flow

“Investing cash flow” may or may not be relevant depending on the size or operations of the business. Such cash flow may be incoming or outgoing.  Examples may include business acquisitions, insurance settlements, or loans originating from the business or business owner. Generally, the equation from “investing cash flow” is earnings from any investments minus any liabilities, such as loan payments or insurance liabilities.

  • Financing Cash Flow

“Financing cash flow” moves between owners, investors, and creditors. The owners themselves could move cash into the company from their own savings or other income sources. Aside from owners, investors or creditors may contribute to the financing of the company. Investors, for their part, could overlap with creditors, who could issue loans or other financial arrangements.

In consideration of the interests of investors and creditors, owners should consider the appropriateness of moving cash out of the company coffers, depending on circumstances. The most common formula for “financing cash flow” is the following:

Financing Activities Cash Flow = CED – (CD + RP). This formula could help a company issue a cash flow statement.

  • Other Cash Flow

Other types of cash flow might involve charitable contributions, earnings or costs for company events, or any variety of incentives for employees, assuming use for the company’s business purposes. Calculation methods may defer to the owner’s convenience and operations procedures.

  • Cash Flow Statements

The above four categories suggest methods of organization for cash-flow statements, for record-keeping purposes. Companies should issue a cash flow statement at least quarterly. The company’s management may use the above classifications at their discretion.  However, the statements themselves are necessary records for any company’s archives, both for outside requests and internal reference.

We hope that you have enjoyed this article and the prior one on profitability.   We work hard to bring our audience timely and important information.

We do not charge members any dues or fees.  If you are not yet a member of VAMBOA, please join here:

Members may use our seal on their web sites and collateral and will receive special discounts and other important information.