Running a financially successful business is all about the numbers. One of the key elements of a successful business is how often the CEO or business owner is paying attention to cash flow. Cash flow is simply defined as the movement of money in and out of your business. Working with business owners on cash flow regularly is smart because it provides a clear picture of one of the most important financial health indicators for your company. Heads of small-to-medium-sized businesses (SMBs) often think their bookkeeper/accountant is managing this critical part of the finances. Not necessarily so. The reason it’s often overlooked is because bookkeepers and accountants are transactional professionals and rarely understand how the business model works at a higher or “futuristic” level.
It is a fact of doing business that you can either control cash or be controlled by it. In the past, I’ve written about a great resource for understanding why cash matters and how to get a handle on it. The book Financial Intelligence for Entrepreneurs by Karen Berman & Joe Knight is a relatively easy read and provides some simple reasons why understanding your company’s cash flow is so important:
● It can tell you how financially healthy your company is and where the cash is coming from.
● You can capitalize on the things you are already doing well.
● You’ll make better decisions day in and day out than those who focus purely on the
income statement.
The authors also discuss “Free Cash Flow”, which is a metric that one of the greatest investors of all time, Warren Buffet, has used for years. 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
Simply put, when you are generating cash from operations you should be re-investing in your
business. This creates healthy cash flow that sustains and grows companies. All of this valuable information is available from your Statement of Cash Flows, which I think is perhaps the single most important financial statement. Unfortunately, most business owners have never seen this statement or been trained in how to read it.
When working with CEOs and heads of SMBs to read and understand this statement, and then translate it to a cash flow forecast, this analysis often 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!
About Rick:
Rick Arthur is a CFO whose professionalism is built on Financial Intelligence and 35 years in
senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as an advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth, and sustainable success.
INDEPENDENT CONTRACTOR OF MONEY CONCEPTS INTERNATIONAL, INC.
Maestro Associates is an independent firm not affiliated with Money Concepts Capital Corp. All securities through Money Concepts Capital Corp. Member FINRA/SIPC.