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Your business is profitable… but for some reason your cash is always tight. It almost feels like there’s a cash flow leak somewhere in your business. But you’re not sure where the leak is… or why it’s happening… or how to fix it.
Maybe you had to put money into your business recently… and you’re concerned you may have to put more in soon. You’re frustrated because the business should be making distributions to you, not the other way around!
You asked your CPA to explain what’s going on. But their response just muddied the waters even more. They sounded like they were speaking in a foreign language which only made the problem seem even less understandable. (I can say that because I’ve been a CPA for over 30 years now. I know how accountants and CPAs were trained. And I know they were not trained to make financial information simple and easy-to-understand.)
Maybe the Problem Will Go Away
With no real answers or solutions, you try to get back to running your business. Yes, that nagging sense of doubt and confusion about your cash flow continues to float around in your head. But you try not to let it drag you down too much. And you try not to let your employees or customers see the worry you are feeling.
Take a minute to imagine this: Imagine you are a student in a college classroom. You don’t understand the material being presented to you in the class. When the professor speaks, it sounds like gobbledegook. You’re confused and frustrated… and a little scared. “How am I going to do on the tests? What kind of grade will I end up with at the end of the semester? What if I fail this class?”
You would either drop the class or you would find someone to help you figure out the material. Failing the class is not an option, correct?
In business, if there is a problem to be solved, and solving it is important to your success (and survival), you either get someone else to solve the problem for you or you solve it yourself. Those are the only two smart options available to you.
In this blog post, I’ll introduce you to step one to solving a cash flow problem (or a cash flow mystery).
The first step is to create a simple tool to help you understand what’s going on with your cash flow. Once you have a simple understanding of what’s going on with your cash (your money), the path to improving your profitability and cash flow will jump out at you.
When you truly understand your cash flow each month, you unlock the door to an amazing new world. You will find financial decisions become easier.
You will feel a weight lifted from your shoulders. It even makes it easier to see what’s about to happen financially in your business. You will feel a brand new sense of confidence and control.
And best of all, it will free up your energy and unique abilities so you can focus on what you do best in the business.
And it all starts with learning a simple approach to understanding your cash flow.
It’s Time to Simplify Your Cash Flow
If there’s a secret to understanding cash flow, it’s getting laser-focused on simplification. In a strange way, simplification has become a long, lost art in the CPA and bookkeeping community. The financial professionals providing financial statements and tax returns for entrepreneurs and business owners are inadvertently adding to the problem. They are complicating the picture rather than simplifying it.
The first step in simplifying cash flow is to ask and answer this one question every month:
“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). As Albert Einstein said:
“If you can’t explain it simply, you don’t understand it well enough.”
Consider this. You are about to sit down with your banker or your business partner or an investor. You have 2-minutes to briefly explain to them what happened to your cash last month.
Not the nitty, gritty, greasy, grimy details. They just want a short, big picture discussion about your cash flow. Your mission is to provide them that understanding while also demonstrating that you know what’s going on in your business financially.
Do you stumble and struggle to explain what happened to the cash… and eventually suggest they talk to your accountant or CPA? If so, then they won’t get the basic information they want from you and you’ll look clumsy and weak in the process. That’s a warning sign you should pay very close attention to.
I’ll show you how to confidently and credibly explain what happened last month in a way they can understand and relate to… and help you look smart in the process? This is the secret to creating confidence and trust in the minds of those who can help you fund and grow your business.
Business Owners and CPAs Don’t Think Alike
The primary challenge is that the tools created to manage cash flow were developed with accountants in mind… not business owners. But that approach doesn’t work so well because entrepreneurs and accountants don’t think alike. They come at things from a very different perspective.
I learned that lesson very early in my career as a CPA and a CFO. I discovered 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.
Here’s what I mean:
- 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 Cash Flow Focus Report provides the solution by bringing common sense principles together with a simplified presentation of cash flow. 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.)
For one business owner, their 2-minute explanation (after completing the Cash Flow Focus Report) looked like this:
“We made $350,000 over the last six months but cash was down by $50,000. The reason for the reduction in cash (despite strong profits) was the new facility we purchased for the Texas expansion and an increase in accounts receivable based on landing ABC Co. as a new customer.”
Removing the Cash Flow Mystery
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. You will begin making more confident 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.
And it all starts with learning a simple approach to understanding your cash flow.
Using the Cash Flow Focus Report is the fastest way to zero in on what’s really going on with your cash flow. You will be surprised how quickly it points you to problem areas (and therefore to profit and cash flow improvement opportunities).
Philip Campbell is a CPA, financial consultant, and author of the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. He is also the author of a number of online courses including Understanding Your Cash Flow – In Less Than 10 Minutes. His books, articles, blog and online courses provide an easy-to-understand, step-by-step guide for entrepreneurs and business owners who want to win financially in business.
Philip’s 30 year career includes the acquisition or sale of 33 companies (and counting) and an IPO on the New York Stock Exchange. He helps put the structure and tools in place so the financial side of your business is strong and provides the insights you need to make money, improve cash flow, and grow your business successfully.
Understanding Your Cash Flow – In Less Than 10 Minutes
This online course goes deeper into the Cash Flow Focus Report and teaches you the step-by-step process for simplifying your cash flow. I walk you through each lesson while you watch, listen, read and try it yourself using your own cash flow numbers.
The course is very affordable. And there are also some coaching options available if you would like to get up and running fast.
It’s a fantastic way to learn the process.
I take all the risk out of your purchase because I include a 100%, no questions asked, money-back guarantee. You love it or you get your money back in full. Period.
There are two things that are very unique and exciting about this online course.
1. I’ll show you how to understand your cash flow in less than 10 minutes
2. I’ll show you how to explain what happened to your cash last month to your business partner or banker (or maybe even your spouse) in a 2-minute conversation.
I take off my CPA hat and I speak in the language every business owner can relate to. No jargon. No stuffy financial rambling. Just a simple, common sense approach that only takes 10 minutes a month.
Here is how one business owner describes the benefits of the course.
“I googled cash flow projections and found your website online and it appealed to me mainly due to the fact that you speak in laymen’s terms in a way that a non-financially trained person can understand.
The fact that you said you can understand your cash flow in less than 10 minutes a month was also a big reason I bought it. And the fact that you acknowledge that most accountants and CPA’s speak in terms that the normal owner cannot understand and that you would be able to put things in understandable terms really got me.
The monthly cash flow focus report was the best feature for me because learning to do it helped me understand my cash flow statements and the biggest drivers of cash flow.
Another significant benefit is the definitions of cash flow drivers and descriptions of how a negative or positive sway in cash within those drivers affects cash flow. Being able to see at a quick glance monthly what happened to your cash using the focus report is a huge benefit.”