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Value Creation Blog

Is Your Business Going To Run Out Of Cash?

Posted by Josh Patrick

cashHere’s a news flash for you.  You need cash to run your business.  If you agree with that really stupid statement, then why don’t you know how to read your cash flow statement?  OK, well it won’t be all of you…..a few of you will know how to read it.

No, I don’t mean your profit and loss statement.  That’s not a cash flow statement.  I don’t mean your balance sheet, that’s not your cash flow statement either. 

What is a cash flow statement?

A cash flow statement is that thing your bookkeeper doesn’t give you monthly.  They probably give you a profit and loss statement.  They might even give you a balance sheet.  I’d be willing to bet that with lots of you there’s no cash flow statement prepared.

A cash flow statement combines your P&L and balance sheet to tell you what happened to your cash over the period you’re measuring.  It tells you if you’re creating cash or using cash.  And, if you’re not creating cash you might be in for an unhappy surprise.

I thought my P&L told me if I was making money.

Your P&L will tell you whether you made money according to generally accepted accounting principles.  Generally accepted accounting principles don’t help a lot when running a small business. 

Remember that bank loan you made a payment on.  The principle part of that loan doesn’t show up on your P&L.  It does show up on a cash flow statement.  What about the new truck you just bought?  The same thing, not on the P&L.  Increased your inventory.  You just used more cash and it won’t show up on your P&L.  I hope that you’re starting to get the idea.

What will a cash flow statement tell me that’s useful?

It’ll tell you that you either create cash in your business or use cash.  If you’re business is growing really quickly you might be showing a profit and at the same time have negative cash.  That’s what happened to me.  I almost ran out of cash while I was supposedly making lots of money.

I learned about a cash flow statement that hard way.  I don’t want the same thing to happen to you.

How can I use it as an early warning sign?

If you look at your cash flow statement at least monthly, you’ll start to see trends.  You’ll see if your inventory is growing.  You can ask why?  You’ll see if your principle payments to lenders are too high.  You might be able to re-negotiate a better repayment schedule.

You might even see if your receivables are growing.  You can ask if it’s because you’re getting new customers or if payments are getting slower.  Once you understand your cash flow statement, you’ll really start to get a handle on what’s going on in your business.

Can understanding my cash flow help with my bank?

Understand that banks are very aware that cash is king in your business.  Your bank will take your numbers and first look at how many times your cash flow will pay for interest payments.  For example, if you cash flow is $200,000 and your interest payments are $20,000 your bank will be happy.

Next, they’re going to see how your cash flow does when it comes to paying both interest and principle.  If your total bank payment is $50,000 per year, your bank is still happy.  On the other hand, if your total payment is $150,000 your bank might not as happy.  You might use this opportunity to re-negotiate your payment so your ratio is lower and safer.

To know how your bank thinks you must know how to read and understand your cash flow statement.

Remember, happiness is positive cash flow.

This became one of my mantras when I was in the vending business.  We didn’t have great cash flow for many years.  Too many days I would juggle who we could pay and who we would have to delay.  If I didn’t understand how our cash flow worked, I would never have made it through those dark days.

I want you to understand not only why cash flow is important, but having the tools to do something about it.  So, are you willing to learn how to read your cash flow statement?

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Topics: financial planning, Cash Flow, cash flow management

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