Leadership Lesson: The naked truth about cash flow

Published in the Phoenix Business Journal on February 9, 2018

Stripped. In the shower of various financial statements, what do we normally receive? Income Statement (known as profit and loss statement or P&L), check. Balance Sheet, check. Cash Flow Statement, check. Various ratio analyses, check. Ooooops, something missing. What?

Hello, cash flow projection. In a given month, the common cash flow statement tells us how much cash we took in, how much cash went out, and how much cash we ended with. Problem: we do not have a clean view of how much estimated cash we will need during the next several months. Dangerous blind spot. What to do?

“We've demonstrated a strong track record of being very disciplined with the use of our cash. We don't let it burn a hole in our pocket, we don't allow it to motivate us to do stupid acquisitions. We feel that there are one or more strategic opportunities in the future.” –  Steve Jobs, co-founder and former CEO of Apple

Thought shift

Most entrepreneurs believe that getting to break-even revenue and expenses is the holy grail. The holier grail is to get to positive cash flow and stay there. Warning: do not depend upon income statements and balance sheets to portray real cash flow. Why not?

An income statement can mask accurate liquid cash. For example, recording increased sales (orders) that include special deals and discounts. This can raise the cost of sales and lower net cash revenues (income). 

A balance sheet can disfigure a true cash position if excessive cash is tied up in inventories and accounts receivables. Inventories must be sold to become accounts receivables, and receivables must be collected for the actual cash to exist.

A solid cash-flow statement will normalize these and other distortions and provide a good understand of past and current cash positions.

Fortune telling

Now turn to future cash flow needs and stop running blind. What will our real cash flow look like going forward? How much cash will we need to operate and grow the business? And when will we need it? Ask your CFO to generate a formal monthly Cash Flow Projection. 

Downside: we do not want to be caught without enough cash to run the business. No cash to meet payroll? Ugly surprise. 

Upside: Strong cash generation and management provide:

• Growth – a company may need to invest in technology, equipment and facilities - and sometimes acquire other companies or pay dividends. 

• Survival – we are better able to survive economic downturns by having adequate cash.

• Emergency – a better handle on unexpected expenses that need to be paid.

• Frugality – keep expenses low by paying cash in appropriate instances; for example, reduce transaction and bank fees.

• Buffer – avoid the need for expensive, short-term loans.

“Cash is king. Get every drop of cash you can get and hold onto it.” – Jack Welch, former CEO of General Electric

Biggest piggy banks

 Reported by Business Insider in December 2017, the largest U.S. corporate holders of cash are:

1. Apple $262B

2. Microsoft $133B

3. Alphabet (Google) $95B 

4. Cisco $68B

5. Oracle $66B

A cash-healthy club — just look at their stock prices.

The bottom lines

Cash. The fuel of business growth. Not just cash on hand, or past cash usage – but the projected cash flow over the next many months is essential. Ask your CFO to give you a future Cash Flow Projection. Now.

Click here to read this article on the Phoenix Business Journal site.