It is my central belief that becoming a Happy Owner in business begins and ends with genuinely understanding your cash flow.
I believe deep in my bones that understanding your cash flow is fundamental to everything that is required to create financial health and well-being in your business.
I learned very early in my career that the key to understanding anything that appears complex is to first consider this: How can I radically simplify this subject. I use “zoom out” thinking to accomplish that goal. Zoom out thinking is my lens into the bigger picture view of a subject. It helps me use a top-down, rather than bottom-up, approach to simplify the subject and discover the real insights.
To simplify cash flow, I zoom out to highlight the three largest drivers of cash flow with the Cash Flow Focus Report. It is the tool that simplifies your cash flow and helps you create the 2-Minute Summary. The 2-Minute Summary documents your understanding of your cash flow in a few sentences. It allows you to quickly communicate to yourself (or others) what’s really going on with your cash flow.
Imagine you were planning to sit down with your business partner, your banker (maybe even your spouse) and explain to them “what happened to the cash” last month. Not the nitty-greasy-grimy detail about the ins and outs of cash, just a short, big picture overview that helps them understand your cash flow in a commonsense fashion. And that conversation can only last two minutes. You do that with the 2-Minute Summary.
The 2-Minute Summary is similar to how you might answer the question: “How was the weather at your family get together yesterday?” Your response to that question would be short. You might say: “The weather was awesome. It was 75 degrees, there wasn’t a cloud in the sky, and the breeze felt wonderful. We had a fantastic day.”
That’s the essence of the 2-Minute Summary. Short, helpful, and to the point. It helps you to describe quickly and confidently to yourself or others what’s going on with your cash flow.
This is the secret to simplifying, and truly understanding, your cash flow.
Making it Simple… Leads to Understanding… Which Leads to Action
Here is a quote attributed to Richard Feynman, a renowned theoretical physicist who received the Nobel Prize in Physics in 1965 and was celebrated for his engaging teaching style:
“If you cannot explain something in simple terms, you don’t understand it.”
I like this quote because it says that even in the complex field of physics, it is a superpower to be able to express yourself in simple terms that you and others can easily relate to. The ability to explain something in simple terms clarifies your thinking. It forces you to zoom out to see the bigger picture and test your understanding from a top-down rather than a bottom-up perspective.
When it comes to managing and improving your cash flow, this simplification exercise helps you see each of the three largest drivers of your cash flow more clearly. That clarity is essential because it naturally, almost automagically, focuses your attention on the drivers of cash flow that need improvement.
In his book Ready for Anything, David Allen says:
“Simple, clear purpose and principles give rise to complex and intelligent behavior.”
I like this quote because it highlights the fact that a simple, clear understanding of your cash flow gives rise to intelligent behavior. The reason that you need to understand your cash flow is that it points you to the specific actions you can take to improve your cash flow.
A Small Business Example
Here is an example of the 2-Minute Summary for a small business that I highlighted in my blog post on a real-world example for understanding your cash flow. (The example also includes a peek at the Cash Flow Focus Report.)
The 2-Minute Summary: Cash was up $15k for the year. Profit was $141k on revenues of $3.4 million. Capital expenditures includes purchases to replace and upgrade vehicles used for installation and service. Notes payable was up because the capital expenditures were funded with debt. The ending cash balance was $109k.
Here are two different ways to write the 2-Minute Summary in another small business example. The first one is the short and sweet version:
“Cash was down $6k to $110k. Profit was healthy and on plan. Receivables were up because several large orders shipped, and the invoices were outstanding at month end.”
Another way to write the 2-Minute Summary is to provide a little more information in your summary. That way you more fully document your understanding. Here is the slightly longer version:
“We made good money this month on higher sales. We shipped several large orders to a great customer. But those orders were sold on credit (we invoice 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 several 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 order next month so the “timing difference” in our cash flow should turn around nicely next month.”
Simplify -> Understand -> Improve Your Cash Flow
Cash is the real bottom line in business. I can’t overstate this central theme enough – Cash is the real bottom line in business.
Managing the financial side of your business is quite literally “all about cash flow.” The starting point for smart financial management is to have a process that makes it super-easy to understand the big picture view of your cash flow. Whether you are looking at last month, last quarter, last year, you must be able to answer the question clearly and simply:
“What’s going on with my cash flow?”
The secret sauce is to Simplify the process of Understanding your cash flow so you can Improve your cash flow.
The Cash Flow Focus Report and the 2-Minute Summary will work wonders to help you better understand, then improve, your cash flow.
And improving your cash flow will go a long way to helping 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 36 companies (and counting) and an IPO on the New York Stock Exchange.