Everyone can appreciate that cash is the lifeblood for any business; start-up, family owned, Fortune 100, etc. It's the lifeblood for every household as well, and the principles of being in control of cash flow apply equally well to our personal lives. Be it at home, or the office, cash fuels every action we want to take today and in our future.
There are a number of common ways to measure cash as well, and most are likely familiar to us, even if we are not accountants. Statement of Cash Flows traditionally include how much was earned in a period of time, what came from operations, what was non-operating in nature, investment and financing activity...essentially a way to say what was earned on paper and how much cash was retained after all of the activities to support the business. However, the fundamental flaw in most discussions about cash is that is measures what happened, in the past, and does not adequately identify the current health and what is about to happen to the business.
Significant learnings can take place looking backward at what has happened in a business in terms of its sales, income, and spending...learnings that can quickly be leveraged as best practices or adjustments to minimize or eliminate bad trends. However, the art comes in by always looking forward...what is the status today, and what is happening tomorrow, next week, next quarter. Looking at contingencies to help prioritize the use of cash to drive the best growth for the business is critical.
Small businesses, start-ups, or businesses that are not hitting its growth or margin objectives need to simplify the analytics and focus on a select few metrics. True Cash Flow, the cash flow that measures what is about to happen, is one of the select few items that needs to be reviewed daily for these businesses.
My recommendation for any business is to have a dashboard, or a handful of critical metrics, that are always focusing on the future of the business rather than looking at the historical records. History and traditional financial statements will guide the future projections, of course, but they are just that...history. Much like a motorcycle, there is no reverse gear in business, you only move forward in time.
Simply put, if you can't predict what the business cash flow position will be in "x" days from now, you aren't in control of your cash, and possibly not in control of your business.
I'm always happy to share some of the templates and approaches we have found useful over the years. Feel free to contact us anytime!
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