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A deep dive on cash flow

cash flow cash management kpis Oct 06, 2022

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Last week we discussed profit and what it means to the business. If you missed that, you can check it out here.

This week, we’re going to talk about leg 2 of the 3 legged framework to master your business’s money: Cash Flow.

When I talk to business owners, I always like to ask the question: how often do you look at your bank statement?

Too often, this answer is daily. Now, don’t get me wrong… cash balances are important. But unfortunately, many business owners manage based off that cash balance.

There are a few problems with this: it’s a lagging measure. That means that when you see cash move, it’s moving because of actions taken weeks, months, or even years in the past.

Let’s talk about what this means. Too often, those in the business can feel a slow down coming.

Your call volume decreases. Requests from clients get more sparce. You start to feel just busy instead of crazy busy.

But, you look at your financials and your cash balance and all seems fine. It gives you a level of comfort that is not merited.

Then, 2 months later, you’re plugging along with the new normal and your cash balance starts to decrease. First, you tell yourself it’s just one week or one month. Next month will be better. Then next month is worse. At this point, your panic sets in.

Should I stop paying suppliers? Am I going to make payroll? Is this the end?

It happens quickly, it really does.

To get out of this cycle, you have to understand your cash flow.

I believe part of the reason we go through this cycle is that no one actually understands their Cash Flow Statement.

But, it’s one of the most important metrics a business can understand. Cash “feeds” the business. When you have cash coming in at a greater clip than it’s going out, you can:

  • reinvest

  • fund growth

  • pay out dividends

Many think this is profit, but it’s not at all the same. Profit is the illusion of cash, but not actually cash. Profit is a good measure, but it’s not the measure. So we absolutely care about profit… that’s why it’s part of this 3-part framework. But we care about profit in conjunction with cash flow.

If profit and cash flow are divergent, we have an issue. So, we want to make sure profit and cash flow are jiving.

So, how do we measure cash flow?

  1. Tracking your cash balance

  2. Operating Cash Flow

  3. Free Cash Flow

Let’s break each of these down and which one matters most for your business.

Tracking your cash balance

Too often, people track their cash balance wrong. You’re probably thinking “how can you track that wrong?? Just open your bank account and look.” And you’re right… but this is where everyone goes wrong.

They look at their bank balance inconsistently and without understanding what it means.

Instead, I prefer to look at the trial balance in the accounting system.

The trial balance takes into account checks written but not cashed, thus represents what your balance would be if everything outstanding hit the account today.

For example, say you have $1,000 in your bank account today (looking at your bank’s online portal). So you decide you can write that $1,500 check because you know you’re receiving some checks in the next few days. Well, your bank will still show $1,000. Now your coworker looks, sees that, and writes a check for $1,000 to a vendor they’ve been waiting to pay. Now you’re negative $1,500 instead of $500! Your deposit was only for $1,250, meaning you’re overdrawn by $250. O no!

But, if you look at your trial balance, as soon as you write the $1,500 check, it will reflect in the balance. Often, you can write checks out of an account and then use the trial balance to know what to transfer into that account to cover those checks (just by looking at the balance).

The other thing to address: inconsistency. I recently started working with a business owner who ran his financials every week. He thought he was on top of it, but what he was really getting was bad data. When you look at bank balances daily, you don’t really learn a whole lot. It doesn’t tell you anything about what’s happening going forward.

My recommendation is that you use your trial balance and then look at it once a week. To make this balance accurate, you’ll have to make sure all transactions are recorded, but it’s a good practice to get in. Then, when you look at it, it’s complete and a large enough sample to learn something from a trend.

Daily trends often mean nothing and only create panic.

Operating Cash Flow

Operating cash flow is the cash that was generated during a period of time from the operations of the business.

This can be represented on the Statement of Cash Flows. It takes into account:

  • Non-cash transactions from the Income Statement

  • Changes in Working Capital (AP & AR) on the Balance Sheet

The Income Statement will record sales before you receive the money, so this number helps you see what cash has actually entered the business.

Ultimately, cash drives your business forward. If you don't generate operating cash flows, your business is having to generate cash from other places which is rarely sustainable.

Free Cash Flow

Free cash flow is Operating cash flow minus capital expenditures. If you’re in a capital-intensive business, Free Cash Flow confirms you’re generating enough cash to cover the capital reinvestment needed in the company.

A high FCF can be used to:

  • pay off debt

  • reinvest in the business

  • as a dividend for the owners

This really gives you flexibility and consistently high FCF is the holy grail of running a company.

If you don’t have significant capital expenditures, you might not need to track this one.


Making this shift from bank balance focus to cash flow focus won’t be easy.

It’s a really hard habit to break.

Some systems don’t try and break this habit and put complex systems into place to let you operate that way. I think that’s the wrong approach.

We need retraining. Take away your own access to your bank account online. Allowing you to keep access would be like an alcoholic still going to the bars every night. You might resist it some, but you couldn’t resist it forever.




Thank you for reading--see you again next week.

If you're interested in learning more, here are 3 ways I can help:

  1. Purchase the Financial Statements Decoded eBook.

  2. Join my cohort Financial Statements Decoded. #3 starts 10/17!

  3. Work with me 1-on-1 to optimize your financials and KPIs to increase your profit (booked into Dec 2022).


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