Cash Flow


I speak to a lot of business owners and executives. Some green, some naïve, some very experienced. And I find that many simply do not understand the true financial position of their business.

Some just don’t ensure accurate, timely financial reports. No P&L for months! Many others clearly do not understand the numbers put in front of them. Even the difference between Gross Revenue and Gross Profit elude some of them. And plenty of others get the right information, but focus on entirely the wrong metrics when they do look at it.

My intent is not to be demeaning. It took me years to fully grasp financial management. Understanding that many people who rise to executive roles have little or no financial training causes me to publish this webpage.

Remember. It’s not numbers, percentages or ratios you put in the bank. It’s CASH.

And so I find myself cautioning disbelieving owners. Celebrating a potential Sales win for example, that they have no manufacturing capacity to support. “But it’s worth several million dollars!” they cry. “We have to do it!

No, actually, in some cases you shouldn’t!

In fact you must not take it at margins and payment terms that will cripple your business. “But this will grow our sales by 25%” they wail. “And what we lose on margin, we will make up on volume”. What a seductive, but fallacious argument. If you are losing money on a transaction, greater volumes of that transaction just mean you will lose more money, more quickly. We have seen it countless times. Usually the cash flow implications will do the damage before the reduced margins get you.

And, increasingly, I find myself interrupting a self-satisfied Board of Directors meeting, where we are studying a gorgeous set of P&Ls, which show juicy profits. And then I go and spoil it by asking for a balance sheet, a debtors aging report and a cash flow report. What a buzz-kill!

Smiles fade as we realize the ‘massive profit’ they have made this year does not correlate with an almost empty bank account, and massive creditors list of past due payments. Why? Because they are not collecting debts in a timely manner. Or sometimes, they have not accrued for taxes (often owing money to the government, an institution not known for patience or forgiveness in any country) which looms like a massive iceberg.

Look at it like this.

Revenue is only the bluntest of instruments when it comes to measuring business health. All revenue is not equal. We have to look at both margin and the cost of generating that revenue. So while obviously important to grow customers and sales, chasing revenue at the cost of all else is Vanity. I know companies with $50 Million in sales, who at the same time carry $5 Million in debt and make annual profits of only $100k. I also know businesses with total revenue of $10 Million who are debt free, have $2 Million in the bank, and make almost $2 Million EBIT per year. Which owner do you think sleeps better?

Profit is a far more reliable indicator of business success. But, profit on a P&L can be misleading. A rigorous P&L will give you a snapshot of your business performance over a set period of time. And, it will tell you whether your business model is working, Sanity. But profit, on a P&L, can still be a mirage. We can’t pay next week’s wages with a set of financial statements, no matter what those statements say.

You need cash. Cash is the love of your life, your one true friend. The one you can trust. Cash is King!

Not everyone agrees by the way. I have been lectured by countless ‘high-flyers’, much more cleverer than me, who tell me debt is good. Using other people’s money is smart, and cash in the bank is lazy money. Most of them are bankrupt now.

Cash is reality. Make sure every ‘deal’ you plan; every new strategy; and every new hire, is only agreed upon when you know the cash implications.

Most business meetings focus on revenue and paper profit. Yes, important, but always ask these 3 questions:

  • How much cash will it take from the bank?
  • What are our debts and our liabilities?
  • What is the cash flow projection of this initiative?

Cash is like oxygen. It’s not what we live for, but if it runs out you sure as hell will notice.

Revenue is vanity, Profit is sanity, but Cash is King.