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Making Cash Flow Simple and Easy to Understand – Part 2

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In Part 1 of this blog post series on making cash flow simple and easy to understand, I shared the surprising results of my super-short survey that asked “How do YOU define cash flow in your business”?

In this post, I’ll show you that “cash flow” is not a single number on your financial statements. And why it is time to totally rethink how to understand what’s going on with your cash flow.

First, let’s clarify what I mean by the word “cash”.

What is “Cash”?

When I use the word “cash” in the context of business, I am referring to “money”. Specifically, money in the bank. Which is a little different than how the word cash is used in our personal life.

Think about when you go to a grocery store or a convenience store to buy something. You are asked whether you will be paying by cash or credit/debit card. In this case, the store is referring to cash as dollar bills. If you use “cash” at a store, it means you are pulling money out of your wallet or your purse.

In a business context, I will be referring to cash as money in its electronic form… as numbers flying around in the digital world and ending up in your bank account. I will be referring to the line item on your balance sheet labeled “Cash”.

Cash is easy to measure. You can look at your balance sheet for any period and see a line item labeled “Cash”. It shows you how much cash you had at that point in time. It was $452,367. Or 225,959. Or $93,283. It is a single number on a separate line of your balance sheet. It’s the amount of money you have in the bank.

But things get a little more difficult when you add the word “flow” to the word “cash”. Now you have cash flow – or money flow. But that creates some interesting questions:

  • How do you define money flow… or cash flow?
  • Can you measure it for a specific month or year?
  • How would you go about putting a single number on the flow of money through your business?

Cash Flow is NOT a Single Number on Your Financial Statements

Most business owners are surprised to learn that the two words “cash flow”, by themselves, do not show up on their financial statements. You will NOT see a line item labeled “cash flow” on your P&L, balance sheet, or even on your statement of cash flows.

When you run the Statement of Cash Flows in QuickBooks, the words “cash flow” appear only once in the report (as “cash flows”)… and that’s in the title of the report. The title of the report is “Statement of Cash Flows”. That is the only place on the report where the words “cash flow” appear.

There is no line item in QuickBooks with a description or dollar amount associated with the two words “cash flow” in the Statement of Cash Flows. Or your P&L. Or your balance sheet.

In the Statement of Cash Flows, you will see line items like “Net cash provided by operating activities”, “Net cash provided by investing activities”, “Net cash provided by financing activities”, “Net cash increase (decrease) for the period”, etc. Each one of those line items has a dollar amount associated with it. But none of those line items are labeled “cash flow”… and the two words “cash flow” don’t even appear in those descriptions.

No wonder the definition of cash flow confuses so many business owners (as well bookkeepers and accountants).

The Statement of Cash Flows Report in Xero

If you run the Statement of Cash Flows report in the online accounting software Xero,  the words “cash flow” appear more often. But there is no line with the two-word description “cash flow”. You will see line items like “Net Cash Flows from Operating Activities”, “Net Cash Flows from Financing Activities”, and “Net Cash Flow”.

In the report from Xero, “net cash flow” has a dollar amount associated with it. That number is the same as the “Net change in cash for the period”.

Here is an example from the Statement of Cash Flows report in Xero (with the column for amounts excluded):

The “net cash flow” description can be helpful because it makes it clear that it is referring to a net number. It is referring to the concept of taking the dollar amount of cash coming in the door and subtracting all the cash that went out the door.

Or, as a shortcut, you can take the cash balance at the end of the month and subtract the cash balance at the beginning of the month. That’s the change in cash, the net cash flow you might say, for the month.

Is a Decline in Your Cash Balance Always Bad?

If you started the month with $375,000 and ended with $425,000, then the change in cash was $50,000. Your cash balance went up. If you had ended the month with $300,000, then the change in cash would have been ($75,000). Your cash balance went down.

But, and this is a really big but, you don’t know whether that change in cash (whether up or down) is a good thing or a bad thing.

Here is an example from a small business that will help you see why a decline in your cash balance is not always bad.

The business started the month with $200,000 of cash and ended the month with $150,000 of cash. Their cash balance went down by $50,000. Their “net cash flow” was negative. They have less cash (money) at the end of the month than when they started the month? Question: Is that a bad thing? Answer: No!

Their profit came in well above expectations, they did a good job collecting on their accounts receivable from customers, and they paid off all their debt to the tune of $100,000 during the month.

Becoming debt-free in their business has been a goal of theirs for three years now. Over the past three years they have paid off $500,000 of debt. Now they have zero debt. They feel absolutely on top of the world. Their business is getting stronger and stronger financially and their future is looking even brighter.

BUT, they have less money in the bank at the end of the month than when they started the month. Are they unhappy? NO. They did that by design. It was intentional. It was part of their larger strategy to improve the financial health and wellness of their business. It was smart.

And they were very happy about their cash flow for the month.

Making Cash Flow Simple and Easy to Understand

In my next post in this series on making cash flow simple and easy to understand, I show you how to understand your cash flow using the 2-minute conversation.

The 2-minute conversation is where you understand your cash flow for the month so well that you can explain it to your business partner, banker, maybe even your spouse, in a simple 2-minute conversation.

Simple, fast, and focused. 😊

 

Philip Campbell is an experienced 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 35 year career includes the acquisition or sale of 35 companies (and counting) and an IPO on the New York Stock Exchange.

Understanding Your Cash Flow – In Less Than 10 Minutes

cash-flow-webinar-larger

This online course 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.”

CLICK HERE TO LEARN MORE ABOUT THE CASH FLOW COURSE

Making Cash Flow Simple and Easy to Understand – Part 1

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In a recent blog post, I asked how do YOU define cash flow in your business?

Here is the list of potential answers I put in the survey:

 

The Survey Responses

Let’s look at the responses from the survey. The percentage of people that selected each of the possible answers is shown below. (The question only allowed you to choose the one answer that best defines cash flow.)

The most popular answer was that cash flow is defined as cash in minus cash out. That answer make sense in that it captures the essence of the word “flow”. And because cash “flows” into and out of a business, you could argue it is the most logical answer given you could only choose one answer that “best defines cash flow”. And it also captures a desire most people have to try to put a number, a single dollar amount, to the definition of cash flow. Cash in minus cash out equals the net change in the cash balance for the month. What you might describe as “net cash flow”.

“All of the above” was the second most popular answer. And “cash generated by operating activities minus capital expenditures” was the third most popular answer. Both of these answers also put a single number to the definition of cash flow for a specific period.

Answers from Business Owners and Accounting Professionals and Advisers

A subset of the responses included the ability to choose whether they were a business owner or an accounting/financial professional when answering the cash flow definition question. Readers of my blog are a mix of business owners and accounting or financial professionals who advise business owners.

Here is a recap of how business owners answered the question:

The vast majority of business owners chose the “cash in minus cash out” answer for cash flow. A distant second was the “Cash generated by operating activities minus capital expenditures” answer.

Here is a recap of how accounting and financial professionals and advisers answered the question:

The top answer from accounting and financial professionals was very similar to business owners. They also chose the “cash in minus cash out” answer for cash flow.

The second place answer, “None of the above”, is pretty interesting. I included a free form text box labeled “Feel free to add any thoughts below about your definition of cash flow” in the survey. Here are a handful of some of those responses from people who chose “None of the above”:

  • Cash Flow = Cash In, Cash out over a select period of time.
  • I’d define it as: EBITDA plus net changes in working capital.
  • Cash flow is the difference or net changes in cash between current and previous periods (monthly, quarterly, yearly).
  • Cash in and out generated by operating activities, financial and investment activities (including minus).
  • Change in cash.
  • It’s the derivative of cash with respect to time.
  • Cash Flow is the Life Preserver of the business.

Interesting responses. (In hindsight, I almost wish I had provided only the free form box for the answer about the definition of cash flow and not provided the options for picking a pre-defined answer. That would likely have further highlighted the various ideas that people have in mind about what cash flow really is.)

How Does the Dictionary (or Google) Define Cash Flow?

When you go to your favorite search engine and look for an official definition of cash flow, you get a variety of answers. Here are four different sites and their definition of cash flow:

Merriam-Webster’s online dictionary: “A measure of an organization’s liquidity that usually consists of net income after taxes plus noncash charges against income.”

Dictionary.com: “The sum of the after-tax profit of a business plus depreciation and other noncash charges: used as an indication of internal funds available for stock dividends, purchase of buildings and equipment, etc.

Wikipedia: Cash flow is “payments into or out of a business, project, or financial product.”

Investopedia.com: “Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows.”

The Merriam-Webster and Dictionary.com definitions are along the lines of putting a single number, a single dollar amount, on cash flow.

The Wikipedia and Investopedia.com definitions are more along the lines of describing cash flow in terms of money moving into and out of a business. Although you can put a number on those two definitions if you assume that “Payments into and out of a business” and “Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business” to mean that cash flow is the increase or decrease in the cash balance for the period. The net of the money coming in minus the money going out (net cash flow).

One Business… But Two Different “Cash Flow” Results

Here is a quick example of how these various definitions produce different results for “cash flow” when looking at a company’s financial statements.

I have a set of financial statements for a specific small business in front of me right now. When I use the Merriam-Webster definition of cash flow, I come up with an answer that says cash flow for the month was $55,863. It is calculated as “net income after taxes plus noncash charges against income”. The number does not appear by itself in the financial statements, but I can calculate it from the P&L, balance sheet, and statement of cash flows.

Using the same company financial statements, when I use the more “flow” related definitions of cash flow from Wikipedia and Investopedia.com, I get an answer that says cash flow for the month was ($87,120) – meaning the cash balance went down (it was negative) for the month by $87,120. Using this definition, I calculated cash flow as the change in the cash balance for the month. I can get this number from the statement of cash flows. I can also calculate the number by subtracting the end of month cash balance from the beginning of the month cash balance on the balance sheet.

Here’s the rub. In one definition, cash flow was a positive $55,863. That sounds on the surface like a good thing. (For the company I am looking at, that is a good average monthly profit.)

In the other definition, cash flow was a negative $87,120. That sounds on the surface like a bad thing. (In this case the reduction in cash is a good thing because there was a large distribution of excess cash to the owners.)

No wonder cash flow is so confusing for business owners!

Helping You Shine a Bright Light on Your Cash Flow

I love helping business owners simplify the process for understanding, managing, and improving their cash flow.

In this series of blog posts I will share with you a super-simple solution to this problem about cash flow. I will totally redefine cash flow to be something you have never heard before. It is based on common sense.

I will help you make the subject of understanding your cash flow fast and easy… and fun. I’ll show you how to understand your cash flow in 10 minutes or less each month. 😊

In my next post in this series, I’ll show you that “cash flow” is not a single number on your financial statements. And why it is time to totally rethink how to understand what’s going on with your cash flow.

Philip Campbell is an experienced 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 35 year career includes the acquisition or sale of 35 companies (and counting) and an IPO on the New York Stock Exchange.

Understanding Your Cash Flow – In Less Than 10 Minutes

cash-flow-webinar-larger

This online course 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.”

CLICK HERE TO LEARN MORE ABOUT THE CASH FLOW COURSE

How Do YOU Define Cash Flow in Your Business?

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There is a very good reason that cash flow is so confusing to business owners.

The confusion starts with how cash flow is defined in the first place!!!

Please take a minute to answer two super-fast questions below about how you define cash flow in your business.

Create your own user feedback survey

You can see the survey results here. (And I also provide you some surprisingly simple tips to help you better understand and manage your cash flow.)

Thank you very much for your help in the survey.

Simplifying your cash flow is the key to moving from confusion and frustration in business… to understanding and peace of mind.

 

Philip Campbell is an experienced 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 35 year career includes the acquisition or sale of 35 companies (and counting) and an IPO on the New York Stock Exchange.

Understanding Your Cash Flow – In Less Than 10 Minutes

cash-flow-webinar-larger

This online course 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.”

CLICK HERE TO LEARN MORE ABOUT THE CASH FLOW COURSE

A Business Owner’s Insight on Using a Reliable Financial Forecast to Improve Financial Health and Cash Flow

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Are you feeling uncomfortable about the financial health of your business?

Do your financial results (and cash flow) feel like a surprise every month?

Do you have a clear view into where your cash is headed over the next 6 to 12 months?

If you are feeling uncomfortable right now about the financial health of your business, I’d like to help. I want to share with you some insights from an experienced business owner about a surprisingly powerful tool for helping you move from discomfort and dissatisfaction about your business… to financial happiness and peace of mind.

At the heart of providing “adult financial supervision” in a business (a term I lovingly use to refer to wise, experienced financial counsel and coaching) is creating a clear view through the financial windshield of your business. I do that by creating a reliable financial forecast.

A reliable financial forecast is a powerful tool for helping you improve the financial health of your business… no matter how small or how big your company is. Most large companies use the tool religiously. Unfortunately, many smaller businesses don’t.

But think about this for a minute. If you are driving on the highway at 70 miles per hour, it doesn’t matter whether you are driving a small car or an 18 wheeler loaded with cargo, you still need a clear view through the windshield to help you get to where you are going safely. In this case, size really doesn’t matter!

Small or large, you are putting yourself and others at serious risk if you drive (or operate a business) of any size without a clear view through the windshield.

Three Powerful Insights from an Experienced Business Owner

I enjoyed and was challenged by the ‘think top-down, not bottom-up’ approach Philip Campbell teaches in this book. It will change the way you think as a business owner and help you drive different behavior throughout your company. A Quick Start Guide to Financial Forecasting is easy-to-read and provides engaging stories and examples you will find very relatable… and actionable.

I believe a business owner that is making some money, but not getting where he/she really wants to be, will benefit the most from this book. Sometimes business owners find themselves depressed for not having done ‘all the right things’. This book will inspire you to buckle down, take steps to create a reliable, top down overview and forecast, then hone in on where your business is truly going. THEN you can align it to where YOU want it to go!

I also believe that business owners that might not be making money, those that may have overpaid for their business or are overleveraged, will discover that Philip’s approach to financial forecasting will play a large role in their recovery.”

—John Albers, President/CEO, The Albers Group, LLC

This is a note to me from an entrepreneur that I included on the dustjacket of my most recent book A Quick Start Guide to Financial Forecasting. I love this note because it highlights three insights that many entrepreneurs and business owners will find useful.

The first insight is where John says “I enjoyed and was challenged by the ‘think top-down, not bottom-up’ approach Philip Campbell teaches in this book. It will change the way you think as a business owner and help you drive different behavior throughout your company.”

Using a top-down, not bottom-up approach to creating a reliable financial forecast for your business will “help you drive different behavior throughout your company”. I know it might be hard to believe that a financial forecast can help you drive improvement in your business. But I have seen it many, many times throughout my career as a CFO.

There is a certain magic that comes out of the process of thinking through your big-picture drivers of financial results and cash flow. It helps you take yourself up to the 30,000-foot level and look down on what’s going on in your business financially as you forecast (or as you evaluate a forecast that an advisor has prepared with, or for, you).

You begin to see problems and opportunities in a new way. It becomes clearer to you what your financial priorities and initiatives should be over the next 3 to 6 months to help you influence and improve the key drivers of financial and cash flow success.

The second insight is where John says “I believe a business owner that is making some money, but not getting where he/she really wants to be, will benefit the most from this book. Sometimes business owners find themselves depressed for not having done ‘all the right things’. This book will inspire you to buckle down, take steps to create a reliable, top down overview and forecast, then hone in on where your business is truly going. THEN you can align it to where YOU want it to go!”

It is very common for a business to be making a little money, but the owner still has that nagging feeling inside that things are not right. That the financial health of the business is not where it should be. The owner is not totally unhappy about the financial health of the business, but they are not happy either. They feel like they are in a “so, so” kind of existence (financially speaking).

This creates a disturbing feeling inside where “business owners find themselves depressed for not having done ‘all the right things’.” They feel ashamed about business or financial decisions in the past that did not work out well. Or they feel guilty because they did not seek out wise financial counsel or advice in the past.

John’s point was that the process of creating a reliable financial forecast, the process of painting a picture of what your financial results and cash flow will likely be, gets you engaged in thinking about the strategic view and direction of where your business is going. “THEN you can align it to where YOU want it to go!”

The third insight is where John says “I also believe that business owners that might not be making money, those that may have overpaid for their business or are overleveraged, will discover that Philip’s approach to financial forecasting will play a large role in their recovery.”

John’s insight here is like the experience of the business owner that is making a little money, but not really satisfied with the financial health of their business. It is similar in that one of the benefits of creating a view through the financial windshield of your business is that it walks you through a revealing peek inside the financial reality of your business. It stimulates you to think big picture… while at the same time gently forcing you to confront the financial reality of your business.

Confronting the financial reality of your business brings focus to the parts of the business that are underperforming. Or it shines a light on the degree to which you have too much debt and gets you thinking about the implications of servicing that debt. I have seen many times where this process can become step 1 to an exciting review of opportunities that can help you create change and financial improvement.

Sometimes necessity is the mother of invention. A clear view of your existing problems and challenges can sometimes be the catalyst for creating the kind of change that leads to a bigger and brighter financial future for your business.

Small Hinges Swing Big Doors

Financial forecasting is a powerful business tool all by itself. But what excites me even more is the way a reliable financial forecast opens the door to even bigger benefits in your business. It starts by providing you a clear view of where you are going financially. It shines a light on the dangers and opportunities that lie ahead on your journey to grow and succeed in business.

Then even larger doors begin to swing open.

As you make forecasting a part of your monthly financial rhythm, you begin to develop a deeper understanding of your business model and the key drivers of financial results. It creates clarity for you and your management team about what financial success should look like. It highlights the specific drivers of profitability and cash flow that are ripe for improvement. You and your team begin to better understand the financial statements and begin using them as a decision-making tool. It becomes so much easier to respond to the curve balls that business will throw at you from time to time.

Your confidence goes up. The business becomes easier to manage. You spend less time fighting fires. You reduce risk. You free up more of your time to focus on the parts of your business you enjoy and the areas where you can make the biggest impact.

And it all starts with a reliable financial forecast.

Becoming a Happy Owner

My primary objective in creating a reliable financial forecast in a business is to help the owner or CEO improve the financial health of their business. A big picture, top-down forecast will help you:

  1. Define where your business is going financially (and where you want it to go).
  2. Shine a light on the dangers and opportunities that lie ahead of you on your journey.
  3. Create a roadmap to get you there safely and on time.
  4. Monitor your pace and progress on your journey to success.

When you know where you are going and you have a plan to get you there safely and on time, you will feel a sense of courage, confidence, and peace of mind. This is why financial forecasting is such a powerful tool in business.

In essence, it forces you to think strategically about your business and where you want your business to go. It encourages you to paint a picture of what business and financial success looks like in a way that is revealing and enlightening.

In Chapter 2 of my book A Quick Start Guide to Financial Forecasting, I talk in detail about some additional benefits of a reliable financial forecast that I have personally experienced and that I have seen other entrepreneurs and business owners experience. Here is the list:

  • Create the view through the financial windshield of your business.
  • Develop a deeper understanding of your business model.
  • Strengthen your leadership muscles.
  • Help you stop doing things that lose money.
  • Prevent poor financial decisions.
  • Turn financial statements into a decision-making tool.
  • Anticipate the financial implications of growing your business.
  • Tap into the power of a strategically focused CFO.
  • Transform your accounting function into a strategic asset.
  • Promote a deeper understanding of your financial statements.
  • Reduce the risk of error in your financial statements.
  • Reveal answers to your month-to-month business and financial questions.
  • Create a tsunami warning system for your business.

You will be pleasantly surprised by the confidence and courage you feel once you have a reliable financial forecast at work in your business.

Which leads to an important question for you: Are you happy with the financial health of your business? Now is the perfect time to make a commitment to work on improving the financial health of your business.

Here is a link to the Table of Contents for my book A Quick Start Guide to Financial Forecasting. You can get a complimentary peek into parts of the book to see if you like what you see.

A reliable financial forecast can be a surprisingly powerful tool for helping you move from discomfort and dissatisfaction about your business… to financial happiness and peace of mind.

It can help you become a Happy Owner. 😊

 

Philip Campbell is an experienced 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 35 year career includes the acquisition or sale of 35 companies (and counting) and an IPO on the New York Stock Exchange.

A Quick Start Guide to Financial Forecasting

Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher

This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.

Too many entrepreneurs and CEOs today are feeling more like passengers than drivers in their business. They’re staring at their rearview mirror as they bounce along in the passenger seat. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially.

A reliable financial forecast solves this problem by providing a clear view through the financial windshield of your business. It creates the visibility and clarity you need to drive your company toward a bigger and brighter financial future.

What if you had answers to questions like:

What’s about to happen to my profitability and cash flow?

How much cash can we distribute to the owners of the business?

How long will it take to pay off our debt?

What will our taxable income be this year?

A reliable financial forecast puts the answers to these questions at your fingertips. It helps you take control of your profitability and cash flow because it gives you answers to the most important financial questions you have to deal with every day.

Put yourself in the driver’s seat of your business by tapping into the unique and exciting benefits that financial forecasting can unlock for you.

Buy the hardcover at Amazon.

Buy the Kindle version at Amazon.

Buy the book at Barnes & Noble.

Buy the book at Google Play.

If you already own the book, the free tools and downloads are waiting for you. Click here to access the financial spreadsheets, examples, rapid learning guides, and more.

Let’s Look at the Cash Flow of a Cloud-Based Software Company – Xero

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I enjoy looking in on the cash flow of Xero from time to time to see how the company is doing financially. Xero is a cloud-based accounting and business software company. They are a public company on the Australian Securities Exchange.

For the year ended March 2018, Xero lost $28 million and their cash went down by $34 million. My favorite approach to looking at the big picture financial performance of a company is to “xero” in on the cash. I use the Cash Flow Focus Report to do that. Here it is for the year ended March 2018:

The Three Largest Drivers of Cash Flow

Let’s look at each of the three largest drivers of Xero’s cash flow for the year.

Net loss – The company lost $28 million on $407 million in revenues. That’s a big percentage of revenues. In deciding to label this either good or bad, I would normally look at the budget or the forecast to see if it is line with expectations and strategy. In this case, I labeled it as good because losing money (at least for now) is part of their strategic plan to grow. And they are losing less money now than in recent years.

Capitalized development costs – A large portion of the money Xero is spending on the actual creation of their cloud-based software is being capitalized because it benefits future periods. In FY 2018, they put $64 million of those costs on the balance sheet and will amortize (expense) it over time. I labeled it as good because there is very little chance the dollar amount is a surprise to management. 😊

Amortization – $46 million of previously capitalized development costs were amortized (expensed) during the year. I labeled it as good since the costs must be amortized. It is somewhat interesting to note that the amortization charge is much smaller than the amount capitalized for the year indicating there is still a lot of development going on (and that amortization expense will go up in future years).

Other Financial Highlights

  • Revenues for the year were $406.6 million compared to $295.4 in the prior year. $31.8 million of current year revenue was in North America.
  • They have 1.4 million subscribers compared to 1.0 million in the prior year. 132,000 of the subscribers in the current year are in North America.
  • They have 2,021 employees compared to 1,721 in the prior year.
  • They have raised a total of $380 million (or so) since their founding in 2006.
  • Their year-end cash balance was $80 million.

The 2-Minute Summary

Once I create a Cash Flow Focus Report, my next step is to articulate the “2-minute summary.” The 2-Minute Summary is a short, big picture review of the company’s cash flow for the period. It answers the question “What happened to the cash last year?” Here is how I would summarize Xero’s cash flow for 2018:

Cash went down by $34 million during the year. The net loss was $28 million which was much lower than the losses in prior years. Capitalized development costs were a record $64 million as the company continues to develop their software offerings for small businesses. The amortization of previously capitalized development costs was $46 million. The cash balance at the end of the year was $80 million.

Five Year Cash Flow Summary

I also like to look at a summary view of cash flow over the last five years or so to learn about the financial history of the company. This is a great way to see a financial overview from a big picture, “what’s going on with the cash”, perspective. Here is a summary view of the primary drivers of cash flow over the last five years:

Here are some observations about Xero’s cash flow over the last five years:

  • In 2014 and 2015 they raised a ton of cash from equity investors. They have not raised any money since 2015.
  • The net loss has been coming down over the last two years. The big question is whether this trend will continue in the coming years.
  • The increase in capitalized development costs indicates they are going even faster to add to their suite of software tools for businesses (see my note below about the Xero brand refresh). It has increased each year since 2014.
  • Amortization of capitalized development costs is going up as the spending on development costs go up. This is the amortization over 3 to 5 years of the accumulated development costs that have been previously capitalized. This number will be going up in the future (because the spending is going up).

Future Cash Flow

Now we have answered the first key question: “What happened to the cash”? The next question is “What’s about to happen to the cash”? (Those are the two questions you need to be able to answer in your business as well.)

Here is a quote from the Founder, Rod Drury, in the 2018 annual report:

“As we signaled at our half year result, Xero’s organic growth will soon be funded from our own free cash flows – the next stage of our journey will be one in which we are self-funding and focused on realizing the long-term opportunities that we are well positioned to secure.”

It does not sound like they plan to sell more stock in the future. But with the growing expenditures on software development costs, possible acquisitions of other software companies, continuing losses, and a shrinking cash balance, it will be interesting to see if Xero will be forced to raise additional money (either equity or debt) in the years to come.

A Brand Refresh at Xero

The Xero tagline used to be “Beautiful Accounting Software.” Here is a quote for the Founder about how they are refreshing the brand and the tagline:

“Xero is evolving from a back-office accounting platform to a small business platform. There is significant potential in terms of products, services and solutions that we are able to create and extend to small businesses to help them more effectively manage their businesses. Likewise, we have an enormous opportunity to supply more services and value to our Xero partners.

Reflecting this evolution to a small business platform, and consistent with beginning the next chapter, customers will soon see a refreshed Xero brand position in the market. This will be ‘beautiful business’ – a recognition of the role small businesses, our partners and Xero play in building a better world. It will also portray Xero’s commitment to continue providing a powerful business platform that makes doing business easier.”

We’ll see what happens when they provide their annual report for the year ended March 2019. I’ll update the Cash Flow Focus Report and share it with you.

Additional Resources

Here are some links to additional resources and examples about how to use the Cash Flow Focus Report to help you better understand and manage your cash flow.

Using the Cash Flow Focus Report for Xero’s 2016 cash flow.

Using the Cash Flow Focus Report for Xero’s 2014 cash flow.

Using the Cash Flow Focus Report for Scott’s Liquid Gold cash flow.

Step-by-step process for using the Cash Flow Focus Report in your business.

Understanding Your Cash Flow – In Less Than 10 Minutes

I created a short, video-based, online course to help you implement the Cash Flow Focus Report in your business. The promise of the course is to show you how to understand your cash flow in less than 10 minutes a month.

The cost is about the same as a small book. And it comes with my no questions asked, 100% money-back guarantee. If you don’t LOVE it, I’ll refund your purchase super-fast.

Learn more here.

Philip Campbell is an experienced 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.

This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.

Too many entrepreneurs and CEOs today are feeling more like passengers than drivers in their business. They’re staring at their rearview mirror as they bounce along in the passenger seat. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially.

A reliable financial forecast solves this problem by providing a clear view through the financial windshield of your business. It creates the visibility and clarity you need to drive your company toward a bigger and brighter financial future.

What if you had answers to questions like:

What’s about to happen to my profitability and cash flow?

How much cash can we distribute to the owners of the business?

How long will it take to pay off our debt?

What will our taxable income be this year?

A reliable financial forecast puts the answers to these questions at your fingertips. It helps you take control of your profitability and cash flow because it gives you answers to the most important financial questions you have to deal with every day.

Put yourself in the driver’s seat of your business by tapping into the unique and exciting benefits that financial forecasting can unlock for you.

Buy the hardcover at Amazon.

Buy the Kindle version at Amazon.

Buy the book at Barnes & Noble.

Buy the book at Google Play.

If you already own the book, the free tools and downloads are waiting for you. Click here to access the financial spreadsheets, examples, rapid learning guides, and more.

Understanding Your Cash Flow – FAST

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I learned early in my career as a CPA and a CFO that the secret to making the cash flow of a business easy to understand, was to simplify it down to a non-accountant, simple, common sense message that a business owner or CEO could easily relate to.

I routinely heard business owners say, “I know my business is profitable… but for some reason cash is always tight.” They felt like they had some sort of “cash flow leak” somewhere in their business. But they were not sure where the leak was. Or why it was happening. Or how to fix it.

With no real answers or solutions to their problem, their tendency was to “punt” on understanding what was going on with the cash, and just hope that the cash flow would eventually take care of itself.

Here’s What’s Causing the Problem

There are four reasons cash flow is so confusing (and a bit convoluted):

  1. Profit (or loss) is not cash flow – this is the single biggest source of confusion.
  2. There is no clear definition of cash flow – most everyone understands profit or loss because it is one number you can see on a P&L. But cash flow is not quite that simple. It’s not a single number.
  3. An increase in cash is not always good… and a decrease in cash is not always bad – If cash was down one month because you decided to pay down debt quickly, that would be a good thing. On the other hand, if a reduction in cash was due to the bank threatening to pull your line of credit unless you paid the debt down ASAP (and it is going to put you in a bind financially), that would be a bad thing. And if you increased your cash one month because you didn’t pay your vendors, that would be a bad thing.
  4. Accountant speak (and financial statements) – the last issue is as accountants we have done a poor job of making cash flow, and financial statements in general, easier to understand.

The Cash Flow Focus Report to the Rescue

I developed the Cash Flow Focus Report to solve this problem. It’s a simple, common sense approach to understanding your cash flow that only takes 10 minutes a month. It brings focus to your cash flow, simplifies your life, and leads to an understanding and sense of confidence that you will find freeing.

A simplified approach to understanding your cash flow should work like this:

  1. 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).
  2. 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 drivers (changes) in cash last month
  • Write a one-line explanation of each change
  • Determine whether each change is good or bad

You will be surprised at the insights you discover about 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. (You 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 conversation (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.”

A Small Business Example

Let’s start by looking at a real-life small business example.

The business does just under $2,000,000 in sales each year. For the month that just ended, the owner’s P&L showed a profit of $32 thousand. But their cash balance went down during the month by $6 thousand (from $116 thousand down to $110 thousand).

With the Cash Flow Focus Report, we are going to answer the question, “What happened to the cash last month?”

And more specifically, the owner wanted to answer the question, “How did I make money last month but have less cash in the bank as a result? How does that happen?”

Here is the completed focus report:

The 2-Minute Conversation, the result of completing the focus report, looks like this:

“We made good money this month on higher sales. We shipped a number of large orders to a great customer. But those orders were sold on credit (we invoiced the customer on 30-day terms) so we did not receive the cash this month. Accounts payable was up during the month because we had a number of vendor invoices that were entered as expenses, but they will not be paid until next month. As a result, the cash balance went down during the month from $116 thousand to $110 thousand. The good news is we expect to receive the cash from the large orders next month so the “timing difference” in our cash flow should turn around nicely next month.”

The Step-By-Step Process

Now let’s walk through each step in completing the Focus Report using our example company.

Print the statement of cash flows report from your accounting system. Shortly after the end of the month, once you have reviewed your financial statements and closed the month, you are ready to print the Statement of Cash Flows report. In QuickBooks, the report is in the Company & Financial section under Reports.

Create a blank Cash Flow Focus Report. You can create one on paper or in a spreadsheet. (You can download a PDF or XLSX version of the report. Get the PDF file if you are going to do the report in writing. Get the XLSX if you want to enter it there and save a copy.)

Here are the four steps for completing the Focus Report together with the actual focus report for our example company.

Step 1: Drop in the beginning cash balance and the ending cash balance. Round the numbers from the cash flow statement in thousands. This is an important component of keeping things simple. So, a beginning cash balance of $116,235 would be $116. (The XLS has a formula for automatically calculating “All other changes, net” and the “Net cash flow” lines.)

As you can see, there is not much to step 1. Just enter the beginning cash balance for the month and the ending balance (from your financial statements).

Step 2: Identify the three largest drivers (changes) in cash. Find the three largest changes of cash for the month from the Statement of Cash Flows you printed from your accounting system. Enter the category of change (like accounts receivable, profit or loss, inventory, accounts payable, debt service, etc.) and the amount of the change. Use the same sign (positive or negative) as is on the cash flow statement.

While the Statement of Cash Flow you print from your accounting system may have 20 or more lines of numbers, we only pull in the three largest drivers (changes) of cash on the focus report. By just pulling the three largest drivers of cash, we are focusing on the key drivers that impacted your cash for the month.

Step 3: Write a one-line explanation of the change. You will do this for each of the three largest changes. Keeping the explanation to one-line is important because it forces you to simplify your explanation.

If there is a stumbling block in your way to writing your explanation of each change, it’s the fact that there are lots of different drivers of cash flow. And understanding each change means you need to learn a little about how financial statements work. That’s a good thing though. You are severely handicapped in business if you do not have a good working knowledge of your financial statements.

The beauty of the focus report is that you do not have to learn all the different drivers of cash flow all at once. You can learn them in bite-sized chunks. A little bit at a time. Trying to learn about all of them at once is like trying to drink water from a firehouse. It doesn’t work (and it’s not real smart).

Step 4: Determine whether each change in cash is good or bad. You will do this for each of the three largest changes in cash. For example, if cash was down one month because you decided to pay down debt, that would be a good thing. If you increased your cash one month because you didn’t pay your vendors, that would be a bad thing.

The key point to keep in mind in evaluating each change in cash is that not all changes that reduce cash are bad… and not all changes that increase cash are good. Generally speaking, a change that catches you off guard, or might spell trouble financially, would be labeled as bad. You’ll be surprised what you learn about your cash flow as you think about whether a specific change in cash is good or bad.

The Cash Flow Focus Report for Scott’s Liquid Gold, Inc (a Small Public Company)

I came across a public company recently, Scott’s Liquid Gold, Inc and I decided learn more about the company and determine whether I wanted to invest in the company and become a shareholder. The first thing I do when I’m looking at making an investment in a company (public or private), is create the focus report. In a situation like that, I use the focus report to answer the question, “What happened to the cash last year?”

Take a look here at how fast and easy we create insight about this company’s cash flow.

Solving the Mystery of Cash Flow

After you use the Cash Flow Focus Report for a few months, something interesting will start to happen. The mystery around cash flow begins 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).

Understanding Your Cash Flow – In Less Than 10 Minutes

I created a short, video-based, online course to help you implement the Cash Flow Focus Report in your business. The promise of the course is to show you how to understand your cash flow in less than 10 minutes a month.

The cost is about the same as a small book. And it comes with my no questions asked, 100% money-back guarantee. If you don’t LOVE it, I’ll refund your purchase super-fast.

Learn more here.

Philip Campbell is an experienced 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.

This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.

Too many entrepreneurs and CEOs today are feeling more like passengers than drivers in their business. They’re staring at their rearview mirror as they bounce along in the passenger seat. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially.

A reliable financial forecast solves this problem by providing a clear view through the financial windshield of your business. It creates the visibility and clarity you need to drive your company toward a bigger and brighter financial future.

What if you had answers to questions like:

What’s about to happen to my profitability and cash flow?

How much cash can we distribute to the owners of the business?

How long will it take to pay off our debt?

What will our taxable income be this year?

A reliable financial forecast puts the answers to these questions at your fingertips. It helps you take control of your profitability and cash flow because it gives you answers to the most important financial questions you have to deal with every day.

Put yourself in the driver’s seat of your business by tapping into the unique and exciting benefits that financial forecasting can unlock for you.

Buy the hardcover at Amazon.

Buy the Kindle version at Amazon.

Buy the book at Barnes & Noble.

Buy the book at Google Play.

If you already own the book, the free tools and downloads are waiting for you. Click here to access the financial spreadsheets, examples, rapid learning guides, and more.

A Super-Fast Way to Understand Your Cash Flow – An Example Using a Real-Life Company

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I developed the Cash Flow Focus Report to provide a simple, common sense approach to understanding your cash flow that only takes 10 minutes a month. It brings focus to your cash flow, simplifies your life, and leads to an understanding and sense of confidence that you will find freeing.

The very first thing I do when looking at a company for the first time is create the Cash Flow Focus Report. If I work in the business or I’m a shareholder, I create the focus report every single month. I also create the focus report if I am looking at making an investment in a company (public or private).

It’s a super-simple way I use to understand the drivers of cash flow and keep my finger on the pulse of the company’s cash flow.

At the heart of the focus report is to answer this ONE question:

“What happened to the cash?”

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.”

In my view of the world, that ONE question is the single most important question to help me understand what makes a company tick financially. Cash is the real bottom line in business. And this ONE question helps me quickly understand “what’s going on with the cash.”

An Example – Scott’s Liquid Gold, Inc.

I came across a public company recently, Scott’s Liquid Gold, Inc and decided learn more about the company and determine whether I wanted to invest in the company and become a shareholder. Step 1 was to look at their most recent financial results and answer THE question:

“What happened to the cash last year?”

I pulled up a blank Cash Flow Focus Report and got started on answering that question for 2018. Here is what the completed focus report looked like.

There are 4 steps to creating the Cash Flow Focus Report.

  1. Drop in the beginning cash balance and the ending cash balance
  2. Identify the three largest changes in cash
  3. Write a one-line explanation of the change
  4. Determine whether each change in cash is good or bad

I grabbed the Company’s Statement of Cash Flows for 2018 and got started.

Here is a short discussion of the three largest changes, or drivers, of cash for 2018 together with the one-line description of each change and my rationale for labeling each change as good.

Net Income
The company made $2.2 million in 2018 (after income taxes). That’s about 6% of sales. Not too shabby. Problem is their net income last year was $4.7 million. That means net income this year is down about 52%. The press release that accompanied the 2018 financial results included a comment from the CEO Mark Goldstein, that said “We experienced sales challenges in December after a strong start to the quarter and several of our mass retail and specialty channel customers began to aggressively reduce inventory levels earlier than their historical patterns.” In deciding to label this change as either good or bad, I would normally look at the forecast or the budget for profitability to see if the $2.2 million is line with expectations and strategy. In this case, absent having access to forecast or budget numbers, I labeled it as good because net income of 6% of sales is not too shabby. (The big question is which direction net income is headed for the coming year.)

Debt Reduction
The second largest change, or driver, of cash in 2018 was a $1.2 million reduction of debt. They paid off all their debt this year (some of it early). They have zero debt now on their balance sheet at the end of 2018. I almost labeled this change as fantastic rather than just good. 😊 I’m a big believer that reducing debt is critical to managing a business well.

Inventory
The third largest change in cash was a $970k reduction in inventory. Reducing inventory frees up cash so the change is added back to cash for 2018. My assumption is they reduced inventory, at least in part, in response to lower sales during the fourth quarter. They also mention in the press release that they are “focused on reducing inventory levels.” They have almost 137 days of inventory on hand, so I applaud their focus on reducing inventory. I labeled this change in cash as good since the reduction is in line with lower sales and it appears on the surface that they need to reduce inventory.

The 2-Minute Conversation

Once I create a Cash Flow Focus Report, my next step is to articulate the “2-minute conversation.” Assume you are about to sit down with your banker, or your business partner, or an investor (maybe even your spouse).

You have 2-minutes to briefly explain to them “what happened to the cash.” Not the nitty-gritty-greasy-grimy details. Just a short, big picture discussion about the company’s cash flow that enlightens the people you are talking to.

The goal of the 2-minute conversation is to provide them that understanding… while also demonstrating to them that you know what’s going on in your business. (Imagine their horror if they discovered that you, the person running the business, didn’t know what’s going on with the cash flow!)

Here is my version of the 2-minute conversation for Scott’s Liquid Gold’s 2018 financial results:

“Cash increased during the year by $2.1 million. Net income was down significantly from the prior year but still came in at $2.2 million (6% of sales). Inventory was reduced by almost a million dollars, partly in response to lower sales and profit for the year. $1.2 million was used to pay off all the debt, leaving a cash balance at the end of the year of $6.2 million.”

Summary View of Cash Flow Over the Last Five Years

I also like to look at a summary view of cash flow over the last five years or so to learn about the financial history of the company. This is a great way to see a financial overview from a big picture, “what’s going on with the cash”, perspective.

Here are some observations about their cash flow over the last five years:

  • In 2015, the big jump in net income is primarily driven by the reversal of a reserve on their deferred taxes. The offset, since this was a non-cash adjustment, is in the deferred tax line. The deferred taxes relate to accumulated losses in prior years that they expect to use to offset income taxes in future years (which you can see in years 2016 through 2018).
  • In 2016, the company purchased certain assets from Ultimark, including the Prell, Denorex and Zincon brands of hair and scalp care products. The purchase price was $9.0 million (paid in cash). The purchase included $400k inventory, $7.1 million of intangibles, and goodwill of $1.5 million. They borrowed about $2.4 million to help fund a portion of the acquisition.
  • In 2018, net income was down about 52% from the prior year. The reduction was partly driven by lower sales in the fourth quarter. They paid off the remaining debt from the 2016 acquisition and the cash balance ended the year at $6.2 million.

The History of the Company

In 2016 Scott’s Liquid Gold celebrated its 65th anniversary. Very impressive.

Here is a summary from their blog:

“Owning a family business in America is a bit of a paradox.  Family businesses make up more than 80 percent of all American businesses.  Only 30% percent of family businesses, however, survive into the 2nd generation.  And less than 12% survive into the 3rd generation according to the Family Business Institute. Scott’s Liquid Gold is one of the 12% that is still going strong well into the third generation!

Ida Goldstein, a widow with three sons bought the formula for Scott’s Liquid Gold for $350 in 1951.  Her oldest son, Jerry, took the lead with the family business. For the next 49 years, he went on to build a trusted brand and thriving business. Jerry’s son, Mark, began working with his father after graduating from Syracuse University in 1978. Jerry and Mark worked together for the next 22 years until Jerry’s death in 2000. Today, Mark continues at the helm as President and CEO.”

Scott’s Liquid Gold, Inc. develops, manufactures, markets and sells household and skin and hair care products. The Company operates through two segments: household products and skin and hair care products.

The Company’s products include Scott’s Liquid Gold, its wood cleaner and preservative; Alpha Hydrox, its skin care brand; Neoteric Diabetic product, which is specially developed to address the skin conditions of persons living with diabetes; Montagne Jeunesse face masque sachets, which are manufactured by another company and distributed by it in the United States, and Batiste Dry Shampoo, which is manufactured by another company and distributed by the Company to the specialty retailer channel in the United States.

The products in the household products segment include Scott’s Liquid Gold Wood Cleaner and Preservative; Scott’s Liquid Gold Floor Restore; Scott’s Liquid Gold Wood Wash; Scott’s Liquid Gold Dust ‘N Go Wipes, and Touch of Scent Air Freshener.

Big Picture Facts

Here are some interesting facts about the company:

  • 27% of sales are to Walmart. 24% of sales are to Ulta.
  • Their primary brands are Scott’s Liquid Gold, Alpha Skin Care, Prell, and Denorex. They also act as the exclusive distributor of products in certain markets. These products include 7th Heaven by Montagne Jeunesse and Batiste Dry Shampoo.
  • The skin and hair care products portion of the business represents 86% of sales. Household products represents 14% of sales.
  • The Scott’s Liquid Gold product has been declining. They have been working hard to bring new products to market to help offset that portion of the business.
  • They have 74 employees and are based in Denver, CO.
  • They are a public company with about 650 shareholders.
  • Mark Goldstein, the CEO and a member of the Founding family, owns (directly or indirectly) about 25% of the outstanding common stock.

What is The Big Picture View of Your Business?

I encourage you to walk through this same kind of big picture financial and cash flow review for your business. Business owners  are always amazed at what they learn in this exercise. The numbers, the cash, almost always tells a different story than what the owner or CEO thinks has happened over the years.

Remember, the real bottom line in business is cash! Knowing what’s going on with the cash is a requirement in business. The penalties for not paying attention to the cash can be huge… and incredibly painful.

Here is a link to my post that provides the step-by-step guide to simplifying your cash flow with the Cash Flow Focus Report.

Philip Campbell is a 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

cash-flow-webinar-larger

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.”

Click Here to Learn More about the Cash Flow Course

Does Your Business Generate Excess Cash?

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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

cash-flow-webinar-larger

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.”

CLICK HERE TO LEARN MORE ABOUT THE CASH FLOW COURSE

Using Cool Dashboards to Drive Profitability and Cash Flow

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The dashboard you see above is a simple, interactive dashboard a company uses to help them monitor the metrics that matter in their business. The dashboard is interactive, so you can play with it. You can:

  • Mouse over the visuals to get additional information about each metric
  • Move between the five pages by clicking at the bottom center of the dashboard
  • Expand the size of the dashboard by clicking in the bottom right corner
  • Use the “slicer” in the top right corner to dynamically change the time periods being presented.

Check out this short video where I show you how to use the dashboard.

I’m a huge fan of using cool financial dashboards to highlight the metrics that really matter in business.

New technology has made dashboards super powerful and amazingly easy to use (and low cost). I absolutely love the focus they bring to the work of improving profitability and cash flow in a business. It can help you:

  • Use the Monthly Financial Rhythm of business to highlight the metrics that really matter
  • Create and present compelling visual, interactive dashboards
  • Make your dashboards shareable in the cloud
  • Create drilldowns that impress and enlighten
  • Make your dashboards available on mobile devices so insights are available anytime, anywhere, from any device

I will be presenting a complimentary webinar on March 15, 2018 to show you some specific examples of cool dashboards. You’ll be surprised what you can create with the new breed of Business Intelligence (BI) technology and tools available today.

You can sign up for the free webinar here.

If you are reading this after March 15, 2018, you can see the recorded version of the webinar with your free membership here.

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.

This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.

Too many entrepreneurs and CEOs today are feeling more like passengers than drivers in their business. They’re staring at their rearview mirror as they bounce along in the passenger seat. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially.

A reliable financial forecast solves this problem by providing a clear view through the financial windshield of your business. It creates the visibility and clarity you need to drive your company toward a bigger and brighter financial future.

What if you had answers to questions like:

What’s about to happen to my profitability and cash flow?

How much cash can we distribute to the owners of the business?

How long will it take to pay off our debt?

What will our taxable income be this year?

A reliable financial forecast puts the answers to these questions at your fingertips. It helps you take control of your profitability and cash flow because it gives you answers to the most important financial questions you have to deal with every day.

Put yourself in the driver’s seat of your business by tapping into the unique and exciting benefits that financial forecasting can unlock for you.

Buy the hardcover at Amazon.

Buy the Kindle version at Amazon.

Buy the book at Barnes & Noble.

Buy the book at Bookmasters.

Buy the book at Google Play.

If you already own the book, the free tools and downloads are waiting for you. Click here to access the financial spreadsheets, examples, rapid learning guides, and more.

Here’s the Cash Flow Story at Xero

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So how is the cool new accounting cloud based software company Xero doing financially?

My favorite approach to looking at the big picture of a company’s financial performance is to “xero” in on the cash. I use the Cash Flow Focus Report to create a skinnied down version of the GAAP cash flow statement.

I provided a summary of Xero’s cash flow and financial results back in 2014.

Now let’s take a look at their most recent financial results (through the lens of the Cash Flow Focus Report) for the fiscal year ended March 31, 2016:

xero focus report March 2016

The Three Largest Drivers of Cash

Let’s look at each of the three largest drivers of Xero’s cash flow for the year.

Net loss – The company lost $82 million on $207 million in revenues. That’s a big percentage of revenues. (Don’t try that at home!!!) In deciding to label this either good or bad, I would normally look at the budget or the projections to see if it is line with expectations and strategy. In this case, I labeled it as good because losing money (at least for now) is part of their strategic plan to grow.

Capitalized development costs – A large portion of the money Xero is spending on the actual creation of their cloud-based software is being capitalized because it benefits future periods. In FY 2016, they put $48 million of those costs on the balance sheet and will amortize (expense) it over time. I labeled it as good since I doubt the dollar amount is a surprise to management.

Amortization – $23 million of previously capitalized development costs were amortized (expensed) during the year. I labeled it as good since the costs have to be amortized.

Three Year Cash Flow Summary

Here is a summary view of the three largest drivers of cash over the last three years:

xero focus report 3 years ended March 2016

Other Financial Highlights

  • Revenues for the year were $207.1 million. $16.9 million of that was in North America.
  • They have 717,000 paying subscribers. 62,000 of those are in North America.
  • They have 1,454 employees. That is up from 1,161 in the prior year.
  • They have raised a total of $380 million (or so) over the last four to five years.
  • Their year-end cash balance was $184 million.

Stay tuned as we wait to see if cool accounting software, combined with a boatload of cash, can put a dent in the popularity of QuickBooks in the U.S.

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.

This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.

Too many entrepreneurs and CEOs today are feeling more like passengers than drivers in their business. They’re staring at their rearview mirror as they bounce along in the passenger seat. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially.

A reliable financial forecast solves this problem by providing a clear view through the financial windshield of your business. It creates the visibility and clarity you need to drive your company toward a bigger and brighter financial future.

What if you had answers to questions like:

What’s about to happen to my profitability and cash flow?

How much cash can we distribute to the owners of the business?

How long will it take to pay off our debt?

What will our taxable income be this year?

A reliable financial forecast puts the answers to these questions at your fingertips. It helps you take control of your profitability and cash flow because it gives you answers to the most important financial questions you have to deal with every day.

Put yourself in the driver’s seat of your business by tapping into the unique and exciting benefits that financial forecasting can unlock for you.

Buy the hardcover at Amazon.

Buy the Kindle version at Amazon.

Buy the book at Barnes & Noble.

Buy the book at Bookmasters.

Buy the book at Google Play.

If you already own the book, the free tools and downloads are waiting for you. Click here to access the financial spreadsheets, examples, rapid learning guides, and more.

A-3-Part-Cover-WebFree Report: A 3-Part Plan to Breathe Financial Life Back Into Your Business

I have created a report that dives deeper into the 3-part plan and each of the 10 steps in the system for making your business stronger financially. And I am making it available at no cost as part of becoming a member of the Financial Rhythm Membership Group.

Financial success in business can transform your life and the life of everyone who is counting on you financially. Winning financially is an important prize in business.

But there’s no magic wand you can wave that will instantly create financial success. Winning financially in business is a journey. It’s about deciding what you are trying to create financially. Then creating a plan to get you there safely and on time.

This free report provides you an achievable, 3-Part Plan you can begin implementing today. You will be surprised and delighted at the speed with which you see financial results and feel the benefits.

You can sign up for the Free Membership and get instant access to my Free Report: A 3-Part Plan to Breathe Financial Life Back Into Your Business.

And for a limited time, you can download a free copy of my book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore.

Grab Them Both Right Here – Its Free

How to Breathe Financial Life Back into Your Business

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3-Parts-+-10-Steps-Graphic

Every business is going to struggle financially at some point in its life. In fact, you will likely experience it a number of times on your journey to building a successful company.

But there is a difference between financial struggle and feeling stuck. There is a difference between having a simple plan you are following to improve your profitability and cash flow… and feeling overwhelmed and without a strategy.

This article is about helping you get unstuck.

In this article, I’ll share with you a 3-Part Plan for breathing life back into the financial side of your business.

The problem today is too many entrepreneurs and business owners are feeling more like passengers than drivers in their business. Their company is careening along on the highway of business as they wonder and worry about where their business might end up financially. That’s not wise… and it’s certainly not fun.

But what if you had a sensible plan, a roadmap, you could follow that would guide you on your path to building a strong, wealth generating business?

You would have the clarity of knowing what your next steps are. You would have the confidence that comes from having a simple system to follow. Your focus would shift to specifics and away from the fuzziness that creates struggle and confusion.

Making Money is Good

Financial success in business can transform your life and the life of everyone who is counting on you financially. Winning financially is an important prize in business.

But there’s no magic wand you can wave that will instantly create financial success. Winning financially in business is a journey. It’s about deciding what you are trying to create financially. Then creating a plan to get you there safely and on time.

Here is an achievable, 3-Part Plan you can begin implementing today. You will be surprised and delighted at the speed with which you see results and feel the benefits.

Part 1: Confront Your Financial Reality

This part of the 3-Part Plan is about assessing, then improving, the financial health of your business. I break the process down into four steps. These four steps are a unique combination of small steps (baby steps) that will help you quickly assess your financial health. You will be surprised how fast you begin to hone in on the solution once you clear away the fog that is clouding your vision.

Here are the four steps.

Step 1: Build your cash balance to 1 month of expenses. If you have less than one month of operating expenses in the bank, you are probably experiencing unnecessary stress making your life harder than it needs to be. Maintaining a very small bank balance in business turns otherwise simple decisions and processes into complicated and time consuming hassles.

Step 2: Put aside enough cash to pay your income taxes. Taxes should be set aside during the year, not at the end of the year. The government yields way too big a stick to make a mistake when it comes to paying your income taxes. This is one of those “unforced errors” that plagues small businesses more so than larger ones. Income tax payments should never be a surprise.

Step 3: Diagnose your profitability and cash flow weaknesses (then fix them). Financial struggle in business has its roots in profitability challenges and/or the way in which you monitor and manage your cash flow. The secret to keeping this step simple is to think strategically and high level about your financial performance before you begin diving into the details. You need to:

  • Understand and articulate the three largest drivers of cash for the last six months (in a 2-minute conversation)
  • Create the 5-Minute Profitability Assessment (to determine what your profitability should be)
  • Discover where cash is being trapped in the business

Step 4: Create a reliable financial forecast for the next 6 to 18 months. One of the most powerful tools in business is a reliable financial forecast. It provides the view through the financial windshield of your business. It helps you define where your business is going financially. And it shines a light on the dangers and opportunities that lie ahead of you on your journey to creating a bigger and brighter financial future.

Part 2: Create a Financial Safety Net

In business, a financial safety net is created by having some money (cash in the bank) and less debt.

It protects you when financial surprises hit (avoiding the splat on the ground) and it allows you to take measured risks (learning and experimenting) to grow your company.

A financial surprise could be a sudden reduction in sales, a large customer that pays their invoice late, or an unexpected expense that blows a hole in your budget. Without a safety net, you have to scramble to avoid disaster or embarrassment with vendors or employees. With a safety net, you simply deal with the surprise and move on. No drama. No losing sleep.

These three steps in the process will help you build a financial safety net in your business.

Step 5: Pay your bank line down to zero (even if temporary). A revolving line of credit is meant to, well, revolve. You borrow on the line in order to meet seasonal demands or address other short-term cash needs. Then the bank line should be paid back down to zero. The discipline of forcing yourself to pay off your bank line at least once a year (or more) will help ensure you are using the bank line the way it was intended.

Step 6: Reduce your personal guarantees (begin the process). In the early days of building a business it can be difficult to avoid personal guarantees. But as you grow and become more successful, you have more leverage, and more reason, to purposefully begin reducing your personal guarantees. You can begin this process by making a list of your existing personal guarantees.You will be surprised how long the list is… and how big the guarantee amounts are.

Step 7: Build your cash balance to 3 months of operating expenses. Building your bank balance to 3 months of operating expenses creates a cash cushion against surprises. And it provides “dry powder” so you can quickly jump on unique business opportunities that might come your way. Not to mention the fact that there’s nothing like a healthy cash balance to help you sleep well at night.

Part 3: Grow and Enjoy Financial Success

Growing a successful business is much harder than most people realize. Only a small number of people have the unique talents and drive to build and manage a company through the many ups and downs inherent in business. Even fewer people can grow while at the same time make the company worth more and more money along the way.

Ultimately, your financial goal in business is to create wealth and freedom.

These last three steps in the process help you set the stage for a future that is even bigger and brighter than your past.

Step 8: Use existing cash flow for capital expenditures and growth capital. Capital expenditures generally take two forms. The first I refer to as “maintenance capital expenditures”. These are expenditures, or investments, that maintain your existing fixed asset base. Generally speaking, they help prevent decline. The second is growth related capital expenditures. These are meant to add new income producing assets. They are designed to add to your ability to serve more customers, drive revenues higher, and increase profitability and cash flow. You are wise to fund both with internally generated cash as you grow and become stronger financially.

Step 9: Pay down your remaining debt on an accelerated schedule. Debt can be an important tool in helping you build your business. But with financial success comes the ability to pay your debt down on an accelerated schedule. Use a portion of your existing cash flow and allocate it to a more aggressive payment plan. It will feel weird at first. But you will come to love the feeling of strength and accomplishment watching your debt shrink.

Step 10: Reward the owners of the business with cash. The ultimate financial reward for a business owner is receiving healthy distributions of the company’s excess cash. It’s your reward as an investor. It’s your reward for building a successful company. It’s cash you can invest in other assets or ventures as part of building a sizeable net worth for you and your family. It’s a fantastic way to enjoy the fruits of financial success.

Your Next Step

Struggling financially in your business is a sign that something has gone awry. It’s your business sending a flare into the air to get your attention.

You can ignore the signals and keep on trucking. Maybe it will fix itself. Maybe your profits will improve soon. Maybe an increase in your cash flow is just around the corner. Admittedly, that is a plan… but not one that is likely to play out well.

When you have a step-by-step plan to follow you’ll find that identifying the problem and fixing it becomes so much easier. No more worrying and wondering what’s causing the problem. No more sleepless nights wondering whether the problem is about to get even worse.

Start slow. No need to speed through the 3-Part Plan. I designed it so you can implement it in small steps. One foot in front of the other.

Start by implementing step 1. You will begin to see progress much faster than you might imagine. It will help you breathe financial life back into your business.

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.

A-3-Part-Cover-WebFree Report: A 3-Part Plan to Breathe Financial Life Back Into Your Business

I have created a report that dives deeper into the 3-part plan and each of the 10 steps in the system for making your business stronger financially. And I am making it available at no cost as part of becoming a member of the Financial Rhythm Membership Group.

Financial success in business can transform your life and the life of everyone who is counting on you financially. Winning financially is an important prize in business.

But there’s no magic wand you can wave that will instantly create financial success. Winning financially in business is a journey. It’s about deciding what you are trying to create financially. Then creating a plan to get you there safely and on time.

This free report provides you an achievable, 3-Part Plan you can begin implementing today. You will be surprised and delighted at the speed with which you see financial results and feel the benefits.

You can sign up for the Free Membership and get instant access to my Free Report: A 3-Part Plan to Breathe Financial Life Back Into Your Business.

And for a limited time, you can download a free copy of my book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore.

Grab Them Both Right Here – Its Free

Philip Campbell

Philip Campbell is the founder of Financial Rhythm and is the author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher.

He is also the author of the book Never Run Out of Cash: The 10 Cash Flow Rules You Can't Afford to Ignore.

Philip's 30-year career includes the acquisition or sale of 33 companies and an IPO on the New York Stock Exchange. Early on in his business career Philip focused and “preached” so much about the importance of profitability and cash flow that people now call him CASH.

Here's why....

(Financial Rhythm is not a CPA firm)

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Cash Flow Made Simple

Understanding and managing your cash flow used to be a time-consuming, complicated, and frustrating task. Not anymore!

I have created a unique online course that makes understanding your cash flow SIMPLE and FAST!

It's titled Understanding Your Cash Flow - In Less Than 10 Minutes. And it comes with a 100%, no questions asked, money back guarantee.

Learn More Here