Cash flow is an interesting animal. Oftentimes you’re making money in your business but you still have unpredictable swings in cash every month that don’t make sense on the surface.
Sometimes worrying about cash flow wakes you up in the middle of the night in a cold sweat. Your mind is bouncing all over the place concerned about how to deal with your most recent cash flow challenge. Other times you feel that dull sense of doubt and frustration because you don't really know what's going on with your cash flow.
Well, you’re not alone. In a survey of business owners I conducted, a whopping 82% said they did not feel like they had the cash flow of their business under control. Yikes! We all know that cash is the lifeblood of business. And almost everyone agrees that “Cash Is King”. Yet an alarming number of business owners struggle to understand and manage their cash flow.
Why is Cash Flow Such a Mystery?
The problem isn’t intelligence or experience. Entrepreneurs and executives are incredibly smart and talented individuals.
The problem isn’t lack of commitment. Business owners are some of the most hard-working, goal oriented people on the planet.
The problem isn’t that cash flow is rocket science. Every entrepreneur or CEO has seen a Statement of Cash Flows for their business.
The Secret is to Simplify
The primary challenge is that the tools created to manage cash flow have typically been developed with accountants in mind… not business owners. That approach doesn’t work so well because entrepreneurs and accountants don’t think alike. They come at things from a different perspective.
I learned that lesson very early in my career as a CFO. I found the secret to becoming effective with entrepreneurs was to simplify cash flow down to a non-accountant, common sense, simple message that a business owner can relate to. I created an approach that goes straight to the heart of what cash flow is really all about. The approach starts by recognizing that understanding and managing cash flow is all about answering this one simple question:
“What happened to the cash last month?”
One of the beauties of asking a simple question like that is it deserves a simple answer (and very little work to arrive at the answer). Here’s what I mean by:
- You should be able to explain what happened to your cash last month in a 2-minute conversation (to yourself, your business partner, your CEO, your banker or maybe even your spouse).
- It should only take 10 minutes of work to get to that answer
To achieve both of those objectives you have to simplify the process (so it only takes 10 minutes a month) and you have to ensure the process provides information about your cash flow that is easy-to-understand (so you can explain what happened to the cash in a 2-minute conversation).
Here’s how you do that:
- Focus on only the three largest changes (drivers) in cash last month
- Write a one line explanation of each change
- Determine whether each change is good or bad
You will be surprised the insight you get into your cash flow each month by following those three simple steps.
The Cash Flow Focus Report
The ideal tool for simplifying cash flow is the Cash Flow Focus Report. It provides the structure and format to help you keep it simple.
- It could fit on an index card (or even a Post-It note) so it helps keep the work to 10 minutes or less. (I prefer the spreadsheet version though so I can easily save it each month.)
- It provides three rows so you can enter the three largest changes in your cash for the month you are looking at. (I pull the three largest changes in cash from the standard Statement of Cash Flows report from your accounting system. You can grab the three largest changes then toss the Statement of Cash Flows report.)
- It forces you to think about what caused each change and write a one line explanation. (Can’t provide a long-winded answer in only one sentence, right.)
- You evaluate and write down whether each change is good or bad. (Not all changes that reduce cash are bad and not all changes that increase cash are good.)
After you use the Cash Flow Focus Report for a couple months, something interesting will begin to happen. The mystery around cash flow will start to disappear. You will find yourself spending less time worrying about what’s going on with the financial side of your business. And you will begin making more informed decisions because you have a better understanding of how your day-to-day business decisions impact your cash flow (and your cash balance).
And best of all, you will free up more of your time to do the things you really enjoy in the business. That may best the biggest benefit of all.
To learn more about Philip’s Cash Flow Focus Report, (and get your first Focus Report going) check out this post on his blog titled The Power of the Cash Flow Focus Report.
You can also learn more about Philip’s new online course Understanding Your Cash Flow – In Less Than 10 Minutes.