The financial success of your company will ultimately be defined, financially speaking, as the amount of excess cash that it creates and distributes to its owners.
Generating excess cash will determine whether your business has what it takes to create Happy Owners.
The ability of your business to generate excess cash will benefit you in two ways. First, excess cash can be distributed to owners frequently. Distributions of excess cash are the return on investment you earn as an investor, an owner, of the business. You can use those distributions to invest in other assets outside your business as part of your plan for growing your personal net worth over time.
Second, if you decide to sell the business, its value will largely be determined as a multiple of the cash it can throw off to its new owners. The more excess cash your business generates, the more money it will sell for (when/if the times comes to sell the business).
Defining “Excess Cash”
The trick is defining “excess cash”. The challenge is that you can’t look at a single number on your financial statements and see a value for excess cash.
Some people believe that their “profit” can be distributed in the form of cash to the owners of the business. The logic being that sales – expenses = profit. And profit is the amount of money coming in that does not have to go out. So that must be “excess cash” that can be paid out to the owners. But that’s a big mistake.
Profit does not equal excess cash… and it does not even equal cash (whether excess or not). And there could be other obligations the business needs to pay like debt and capital expenditures (just to name a few) that require cash.
Another factor that must be considered in defining excess cash is to think about how much cash you need to have in the bank. My rule of thumb is you should always have at least one month of operating expenses sitting in the bank at any given time.
Keep it Simple
The simple way to determine whether your business is generating excess cash is to look at your cash balance on your balance sheet to see if cash is piling up every month, quarter, or year.
If cash (money) is piling up, and you are paying yourself a market-based compensation in the P&L, then there is a good chance you are producing excess cash. Of course, you need to make sure you are driving debt down and that you are investing properly in capital expenditures that are needed to sustain (and grow) your business.
Think Like an Owner and Investor
Take a few minutes this week to look at your cash flow from a big picture, cash flow perspective.
Question 1 is to determine whether your business is a net creator of cash, or a net user of cash.
Question 2, assuming you get the correct answer above 😊, is to determine the amount of excess cash that you can distribute to the owners of the business.
If you don’t like the answers you get, then it’s time to think seriously about setting 1 to 3 specific goals around improving your profitability and cash flow. The Monthly Financial Rhythm will help you make that happen.
The Cash Flow Focus Report
One of the most powerful tools for quickly understanding the big picture view of your cash flow is the Cash Flow Focus Report.
It is the simplest tool I have found to quickly get a handle on your cash flow.
If you are struggling to understand your cash flow, or determine what your true excess cash is, check out my online course on understanding your cash flow – in less than 10 minutes.
Philip Campbell is a CPA, financial consultant, and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow and 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 create financial health, wealth, and freedom 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.
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.”
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