Audio podcast: 80 percent of business owners don’t really understand their cash flow, do you?

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Chris Bjorklund: Hello, I’m Chris Bjorklund for the Business Resource Center. Today, I’m talking to accounting and financial consultant, Philip Campbell. He is the author of the book “Never Run Out of Cash: The Ten Cash Flow Rules You Can’t Afford to Ignore.”  One of the interesting sections of the book was your survey of business owners that showed more than 80 percent of them don’t really understand their cash flow. That’s a shocking number. Why is that?

Philip Campbell: Well, one reason is that, as a community of CPAs–and I’ve been a CPA for some 27 + years now–but as a community, the CPAs–and especially within CPA firms–have done a poor job of really educating and coaching business owners and entrepreneurs about what’s really going on with their cash flow. It’s kind of gotten into a drill where it’s kind of about the end product. In other words, I got to provide this guy some financial statements for the month or I’ve got to produce this tax return and if I get to go to the next level, to really help the entrepreneur make decisions based on what’s in the financial statements. For example, the financial statements just by themselves do a good job of presenting financial position. They do a good job of presenting revenues and expenses and profitability but the financial statements just by themselves do a really poor job of helping you see what’s going on with the cash flow. And that’s what a business owner really needs. That’s what I learned as being a CFO within companies is that a guy that’s a smart entrepreneur, the person’s running the business, not necessarily a financial kind of person but when I can kind of get into their brain and get in their mind and I know how they think, I can help them instead of just giving them a set of financial statements like what the CPA community has kind of gotten in the habit of doing, I’m helping them understand what’s really going on there, what’s happening with the cash flow because everything really comes down to what’s going on with the cash. And as an example of one way that you can really or a CPAs going to add value for an entrepreneur is that most business people are trying to take a look at the income statement and they say they’re looking at profitability and they equate profitability with cash flow. In other words, if I made $50,000 last month, that must mean I have $50,000 more of cash. Well, unfortunately, that’s not the way the financial statements work. So I think that’s one reason why there’s so much confusion is just that the financial statements are so focused on profitability and financial position and while that’s an important component of cash flow, there’s other things going on. So that’s one thing that I try to do with business owners and entrepreneurs and help them see what’s really going on with the cash flow because when you have that understanding, when you know what’s going on with the cash flow, then you can be sure that the decisions that you’re making everyday around investing money and things like that are really smart.

Chris: Well, Philip, isn’t it true that an in-depth conversation with your CPA would make sense about this or at least some kind of narrative about the financial statements and the cash flow and the securities.

Philip: Oh, it helped tremendously and here’s what you have to do. As an entrepreneur, when you sit down with the accountant and maybe it’s your controller internally or maybe it’s an outside accountant, here’s what you say. You just say, “I got two questions and I want you to help me understand the answer to these questions. The first one is what happened to the cash last month? I see I got financial statements there. I want you to help me understand so I can answer in a couple of sentences what happened to the cash last month?” The next one is, “I want you to help me understand what’s about to happen to the cash?” which is going off into a realm past what the financial statements are for but that’s where a good accountant, CPA, comptroller, CFO can really add value for the entrepreneur. If you can help them answer those two questions then you’re being a really important partner for them and you’re helping them get on top of the accounting and financial side of the business so they’re making good smart decisions.

Chris: You’ve been listening to Philip Campbell. You can find him at www.neverrunoutofcash.com. The Business Resource Center is a free resource for all businesses made possible by the Business Bank of Texas. I’m Chris Bjorklund, thanks for listening.