Audio podcast: Do you know the 2 questions every business owner should be able to answer?

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.”  Now, in your book called “Never Run Out of Cash: The Ten Cash Flow Rules You Can’t Afford to Ignore,” you say there are two questions that an owner has to be able to answer every single month in order to understand and manage cash flow. What are those two questions, Philip?

Philip Campbell: Okay, it’s what I call the two critical cash flow questions. Cash flow number one is, what is my cash balance right now? Cash flow number two is, what do I expect my cash balance to be six months from now? Now the reason these two are important is that the first one, what is my cash balance right now, the only way you can answer that intelligently is you have to have a good set of up-to-date books and records, an up-to-date general ledger. You have to be recording transactions as they occur. You can’t be doing what some people do in really small businesses which is bring invoices and information in and just let it sit and stack until they get around to it.

Chris: You mean in a shoebox?

Philip: Yeah, in a shoebox, exactly. Well, that might work when you’re an itsy-bitsy tiny business but it does not work with an entrepreneur who’s really growing the business and has their sights set on getting to a hundred million in revenues. Everything changes. You got to have a good solid accurate set of records and financial statements and you know you have that if you can answer that question. What is my cash balance right now? The second question, what do I expect my cash balance to be six months from now? And if there is a secret to managing the financial side of the business, if there’s a secret to really understanding what’s going on with your cash flow, it’s this. Because what it does is it takes you and instead of looking at just where you are right now, it puts you in where you expect to be six months from now. And not just from a profitability perspective, it does sit down to the cash flow level. So when you can answer if right now, I got $265,000; the question is, do you have enough cash to meet the debt service obligations you have coming up? You want to make sure that the capital expenditures and the other drivers of cash that you have, that you actually can see what’s about to happen in the future.

Chris: Now what about looking at 12 months from now? Why did you choose six months instead of 12 months? I’m just curious.

Philip: The reason I do that is because the further you go out, the more intimidating it is to the entrepreneur and I’ve created these questions because I want to make it really, really, really simple. What’s my cash balance right now? An entrepreneur would say, “Well, of course I should be able to answer that.” And so then they go and say, “Okay, is my accounting department or is my accounting function doing what they need to do so I can answer that question?” And then when you’re looking out six months, an entrepreneur would say, “Well, you know, I don’t know what’s going to happen 12 months out or 24 months but six months, well sure, I should be able – I should have a view of what’s about to happen over the next six months.”

Chris: Good, so look at it for right now and look at it for six months from now.

Philip: Absolutely. Because it ensures that you got a good solid process in place to keep accurate sets of records right now so you know what you have available and ensure that you have a process in place to look at least out to the next six months and understand what’s going to happen to the cash over those next six months.

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.