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
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.”