Operating Cash Ratio

From TPE BLOG

This is how it works.  First add up all the cash you currently have on hand. Add up the money sitting in the bank at this very moment (even if you wrote checks against it), the cash in your drawer, and the money sitting in your PayPal account.

Next add up all the money that is currently due (including any outstanding payments that haven’t cleared yet), in the next 60 days. This includes bills, rent, payroll and money you are taking for yourself.

Now divide Cash On Hand by Money Due to get the OCR.

OCR Formula

And with that ratio you now have a guide to your company’s financial health.  Here’s what the OCR means:

An OCR of 0 to 0.25 means your business is cash starved and financially unhealthy.  Immediate action needs to take place to cut costs and increase cash on hand (more sales, better collections, etc.).

An OCR of 0.25 to 0.75 means your business is financially stable.  No drastic measures are needed, but you should actively seek ways to increase cash flow (better sales, collections, etc.).

An OCR above .75 means your business is financially strong.  Ironically this means you should take measures to protect yourself from attacks.  For example lawyers love to “go after deep pockets”.  So use this as an opportunity to put your money into capital investments or secure accounts.

By Mike Michalowicz, Author of The Toilet Paper Entrepreneur

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