Know Where You Stand to Keep Cash Flowing

As our business environment continues to evolve it’s more important than ever to know your numbers. With the necessity to pivot, and perhaps pivot again, to keep your business moving forward, you need to know where you stand, especially in terms of cash – the fuel for your business.

Your financial statements tell you where you are – and are your guides to where you want to go. They enable you to track your progress, identify deficiencies, make adjustments if needed, and plan for growth. Yet sometimes business owners don’t know what to look for, or where. That’s risky – especially during these still-unpredictable times. To gain a solid foothold on the path forward, learn to understand and interpret these primary financial reports.

Income Statement

The Income Statement illustrates revenue versus expenses during a specified time period. With this information you can calculate critical numbers like gross profit, operating income, and net income. Net income is, of course, a major indicator of your business’s profitability and financial health. It is the amount your company is left with after paying expenses.

The Income Statement can help analyze the bottom line. Compare earnings to sales forecasts and expenditures to budget. This document should include a column that calculates the percent of income for each line item as well as a Gross Profit line to provide a starting point for improving profitability. But don’t rely on the Income Statement as your only measure of success (i.e. profit) or to really understand cash flow.

Balance sheet

The Balance Sheet shows where cash has been converted to other assets required to operate your business such as inventory, work-in-process, accounts receivable, and fixed assets – providing you with a snapshot of your financial position at a specific moment in time. It should include a ratio analysis of the current month plus historic ratios. This is necessary to provide a starting point for improving cash flow management.

Assets equal liabilities and equity, so the Balance Sheet is a good test of whether your numbers actually add up and is a tool for calculating net worth. It also allows you to assess two key performance indicators.

  • Debt – By dividing total debt by total assets, you’ll see what percentage of your assets is funded by debt. Then you can evaluate whether you need to make changes.
  • Liquidity – Your assets may be in many forms – from cash on hand to real estate holdings. Review your assets, which should all be listed on your Balance Sheet, and determine how quickly those assets can be bought or sold. It may be necessary to consider a different mix of assets to ensure that you have sufficient liquid assets to cover short-term cash requirements.

Statement of Cash Flow

The MOST critical financial piece, and one that many companies don’t produce, is the Statement of Cash Flow. It illustrates how your business moves money around – where cash is coming in and where it’s being spent. It will reveal whether you are generating cash flow from operations – which is critical to staying in business, if you are continuing to invest in your business model, or whether you are borrowing to generate positive cash flow to fund operations.

Positive cash flow equates to having funds to reinvest in your business and is an indicator of good financial health. If you have cash remaining after buying, maintaining, or improving fixed assets, you’re positioned well for growth.

The Statement of Cash Flow is a critical tool for managing finances and making informed business decisions. Tracking and assessing the right data will enable you to truly understand cash flow, and will reveal where you need to start to improve cash flow management and profitability. But don’t stop there!

Cash Flow Forecasting

Don’t set yourself up to be blindsided by unexpected swings in cash flow. Learn to do cash flow forecasting – by far the most important cash management tool – and practice it regularly. It’s incredibly important, especially during our current circumstances, as you chart your course forward. Read my recent blog, How to Take Control of Your Cash With Forecasting, for details on how to prepare a cash flow forecast. It will be invaluable, not only in guiding you to success, but in measuring your progress.

To grow your business and keep it moving forward, you need to be equipped with the Financial Intelligence to assess where you stand, know where you need to go, and plan how to get there. The first step is to understand and implement these vital financial tools.

I’d welcome the opportunity to help you structure your company’s Financial Statements and Cash Flow Forecast and provide pointers for navigating, interpreting and applying their data for optimal growth and success. Contact me for a complimentary review of your financial status.

Written by

Rick Arthur is a CFO whose expertise is built on Financial Intelligence and 35 years in senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as a trusted advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth and sustainable success.