Why Cash Matters
Over the last several months I’ve written a great deal about cash and cash flow. I hope that one or more of these topics have struck a chord with you and will encourage you to take action in creating your cash destiny.
Today, I’m going to share with you a couple of things I’ve learned along the way as well as provide you with a tool to get a handle on your own cash flow.
It is a fact of doing business that you can either control cash or be controlled by it. Much of what I have learned has come from my own personal experience in growing my own business and working with clients. One great resource for me has been the book Financial Intelligence for Entrepreneurs by Karen Berman & Joe Knight. It is a relatively easy read and talks about why cash matters. Without cash you can’t run or grow a business. Here are some nuggets I pulled out from one of the chapters regarding cash flow:
- “…knowing your company’s cash situation in detail will tell you not just whether the overall cash position is healthy but specifically where the cash is coming from”
- “…you can do things to better your cash position”
- “…entrepreneurs who understand cash flow tend to make better decisions day in and day out than those who focus purely on the income statement”
- “…our general point here is that cash flow is a key indicator of your company’s financial health, along with profitability and shareholders’ equity”
In the book, the authors discuss the topic of “Free Cash Flow”. One of the greatest investors of all time, Warren Buffet, has used this metric for years. And for entrepreneurs it should be an important metric as well. So, what is Free Cash Flow? It is the amount of cash generated from operations less the amount invested in capital equipment.
Cash Generated from Operations
– $ Invested in Capital Equipment
= Free Cash Flow
In other words, the cash created from your operations less the amount of money invested to keep it running will determine your level of health. If you are generating cash from operations but are not re-investing in your business, how long do you think you will be in business?
Similarly, if you are not generating cash from operations but investing in your business (which means you are either borrowing or putting in your own money) how long can you sustain it? All this valuable information is available from your Statement of Cash Flows. As I have said many times before, it is perhaps the single most important financial statement, but is rarely presented to, or read by entrepreneurs.
When working with small businesses, our first course of action is to develop a cash flow forecast that can be used to compare against the actual results (Statement of Cash Flow). This analysis allows us to compare what we wanted to happen against the results of what did happen. It is only then that we can understand the gaps and make adjustments. That’s how you control cash and not be controlled by it!
A lot of times it’s not easy for business owners to wrap their heads around cash flow. Forecasting is even more difficult because there are many variables to consider. Over the next couple of months, I’m offering a handful of complimentary Financial Intelligence Cash Flow Consults. It’s my way of helping business owners get a clearer picture of their company’s cash flow without a huge commitment. Learn more here, and then get a better handle on your cash flow in order to make the best decisions for your company moving forward.