We've heard it before... revenue is vanity, profit is sanity, and cash flow is king.
Cash is King and there’s a reason why. It’s the bloodline of every business. Without it, your business will fail. The success (or failure) of every business depends on its cash flow.
Yet, cash flow is one of the most misunderstood concepts with business owners. First, most business owners confuse profits with cash. “My business is profitable, so it’s generating cash”. While this is a true statement, it’s not the whole story. Second, a profitable business does not always mean a healthy cash flow. A business can last years without profit, but it can't last a day without cash.
According to the SBA, 50% of all businesses never see their 5th Birthday and Forbes magazine, only 4% make it to their 10th Birthday. In fact, 82% of small businesses fail due to cash flow problems.
The focus must be on cash flow. Not revenue. Not profit. This is a paradigm shift that big companies already know. It doesn’t matter if you make $1M, $10M or $10B, every business owner must focus on generating more cash from their business. It doesn’t matter how much you make (sales or profit), it matters how much you keep (cash). The cash that stays in the company’s bank account is the true number to focus on.
So, let’s talk about what cash flow is and what drives cash flow.
For example:
End of April Bank Balance: $150,000
End of May Bank Balance: $50,000
What Was May's Cash Flow?
-$100,000
And, what drives cash flow?
What brings cash into your business and what takes it out.
Cash Flow Drivers:
You need more cash flowing into your business than cash flowing out of your business. How do we do this?
There are 7 ways to get more cash flowing in:
Increase Profit
Decrease Accounts Receivable
Decrease Inventory
Sell Assets
Increase Accounts Payable
Adding Debt
Investments by Owner
And 7 ways to get more cash flowing out:
Decrease Profit
Increase Accounts Receivable
Increase Inventory
Purchase Assets
Decrease Accounts Payable
Repay Debt
Owner Draws
Now that we know what drives cash flow, we manage and monitor these drivers to produce the desired cash balance. A simple 6 step process using the cash flow drivers:
Set targets
Update and Analyze Actuals
Create forecasts
Update the Score
Create Objectives
Create an Action Plan (Next Steps)
There IS a predictable way to increase cash flow. This will enable you to make more money, in less time, and with less stress.
Cash flow growth is inevitable when you understand how to move the right numbers.
Want a CFO to do this for you each month? Let’s get on a right fit call.