In my blog post series on making cash flow simple and easy-to-understand, I shared with you my favorite tool for quickly understanding your company’s cash flow – The Cash Flow Focus Report. It is a surprisingly effective tool to help you quickly understand your cash flow each month.
In this post, I will share with you a fun example of using the Cash Flow Focus Report to understand the cash flow of Delta Airlines. The pandemic has had a huge impact on lots of companies…. especially the airlines. When I saw the big loss that Delta reported recently, I was curious to see what’s going on with their cash and cash flow. In my view of the world, cash is the real bottom line in business. So, anytime I review the financial results of a company, I always start with looking at the three largest drivers of cash using the Cash Flow Focus Report.
A Simple Process for Understanding Your Cash Flow
I take a VERY different approach than most financial people to defining cash flow. I define cash flow simply as HAPPINESS. And it (your happiness with your cash flow) is measured on a scale of 1 to 10. Cash flow is not a single dollar amount in your financial statements. Determining whether your cash flow is healthy or unhealthy, or whether you are happy or unhappy with your cash flow, is about quality rather than quantity.
In your own business, at the end of each month, you should rate the quality of your cash flow by asking yourself: “On a scale of 1 to 10, to what degree am I happy with my cash flow last month?” Where 1 is very unhappy and 10 is very happy.
To rate the quality of your cash flow you need to answer these two questions:
- How much did the cash balance change?
- What caused the change?
The answer to question #1 is a dollar amount. And it is easy to calculate. Your answer to question #2 is what I call 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. You do that by identifying the three largest drivers of cash for the month using the Cash Flow Focus Report. This is the secret to truly understanding your cash flow. Simple, fast, and focused.
Let’s walk through the process using Delta Air Lines’ cash flow results for the nine months ended September 2020 (during the pandemic).
The 2-Minute Conversation: “Cash was up a whopping $19 billion for the nine months ended September 2020. They recorded a huge loss that was almost equal to revenues for the period. A portion of the loss was driven by an $8 billion restructuring charge that was non-cash. The company borrowed a huge amount of money in order to try to put enough cash in the bank in an attempt to avoid running out of cash during the pandemic. The cash balance at the end of September was $22 billion.”
Cash Flow Happiness Rating: 3
Let’s talk about of the three parts of the review of cash flow.
- Cash Flow Focus Report. I grabbed the Delta 10-Q for the nine months ended September 2020 from their website then pulled the three largest drivers of cash on their Statement of Cash Flows. Here is a link to my blog post on how to complete the Cash Flow Focus Report.
- 2-Minute Conversation. This is a short, big picture summary of the company’s cash flow for the period being reviewed. It answers the question “What caused the change in cash last month”. If you had 2 minutes to describe your cash flow to your banker, business partner (maybe even your spouse), the 2-minute summary captures the essence of that conversation.
- Cash Flow Happiness Rating. This is a simple, common sense rating of the quality of your cash flow. It is a surprisingly helpful way to think about and indicate whether you are happy or unhappy with your cash flow for the period. In the case of Delta’s cash flow, it is my perspective on the quality of their cash flow for the nine-month period.
The Cash Flow Focus Report
The dollar amounts in the Cash Flow Focus Report for Delta are shown in billions. I do that because one of the strengths of the focus report is revealing the big picture view of cash flow for the year. Rounding the numbers helps make cash flow simple, uncluttered, and easy-to-understand regardless of the size of the business. (Precision is the enemy when you are trying to understand cash flow.)
Let’s look at each of Delta’s three largest drivers (changes) of cash as shown in the Cash Flow Focus Report for the nine months:
Net loss – The huge net loss was driven by a 63% decline in revenue on the reduction in demand from the impact of the pandemic as well as a large restructuring charge. Revenues declined from $35.6 billion last year to $13.1 billion this year. The restructuring charges were $7.8 billion (see below). I labeled the change as bad because it clearly an unhealthy and unwanted loss.
Restructuring charges – The $7.8 billion in charges included $4.4 billion of impairment and related charges on certain aircraft they retired or plan to retire. The remaining charges were related to voluntary early retirement and separation programs as well as some reserves recognized on receivables. All these charges represent actions Delta is taking to address the dramatic reduction in business during the pandemic. I labeled the change as bad because the restructuring costs are huge.
Borrowings – Delta borrowed $26 billion during the nine months to “increase liquidity and strengthen our financial position”. Basically, they were trying to put as much cash in the bank as possible to try to survive through the pandemic. The dramatic reduction in revenues was generating a “daily cash burn” in the millions. With the length of the pandemic unknown, they acted quickly to raise as much cash as possible. I labeled the change as bad because, while borrowing the money helps them survive for a while, the need to bring on such a heavy debt burden highlights the dire financial future they are facing.
The 2-Minute Conversation
The Cash Flow Focus Report provides you the information to write the 2-minute summary. I like to write summary because it is a nice way to put to words what the focus report reveals about how much the cash balance changed and what the three primary drivers of the change were. I envision in my mind that I’m going to sit down with the CEO or a business owner and explain to them in simple English what happened to the cash for the period. And that conversation will last only two minutes. I have found it to be incredibly effective for both financial and non-financial people.
The Cash Flow Happiness Rating
Cash flow is not a single number in your financial statements. And “cash flow” is defined in different ways by different people. What really matters with cash flow is quality rather than quantity. The cash flow rating is my way of using a common-sense approach to “measuring” the quality of a company’s cash flow on a scale of 1 to 10, where 1 is horrible and 10 is awesome. The rating should only take about 30 seconds. It is your top-of-mind evaluation based on completing the Cash Flow Focus Report and writing your 2-minute conversation.
For Delta, I provided a cash flow rating of 3. I have to admit that I used the full 30-seconds to “noodle” what the rating should be. 😊 On the one hand, they acted quickly to begin making tough decisions to cut costs. The government provided grants so they would not need to cut as many employees as they might otherwise have had to cut. They moved quickly to arrange financing to raise a ton of cash. The actions taken by the Federal Reserve and the Congress made money much easier to raise than it might otherwise have been considering the severity of the economic uncertainty created by the pandemic and the actions taken to respond to the virus.
On the other hand, they are losing a bunch of money and they took on a ton of debt. It’s anyone’s guess how long they might be losing money before air travel rebounds to a level where Delta has any chance of making money. And who knows how long it might take them to pay back all that debt once they finally get the business back to being profitable again. The good news is they have survived. The bad news is the value of the company has taken a huge whack and the financial health of the company has taken a huge hit. So, I put my rating at a 3 (on a scale of 1 to 10).
Are You Happy With Your Cash Flow?
I encourage you to walk through this same kind of big picture cash flow review for your business. Take a baby step by doing it for last month’s cash flow. Business owners are amazed what they learn in this exercise.
Remember, the real bottom line in business is cash! Knowing what’s going on with your cash flow is a superpower. 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 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.”