Cash flow is the lifeblood of the business. Run a business for five minutes, and you figure out pretty quickly that you can be profitable and still go out of business; but you can run at a loss, and still be in business — as long as you have cash flow.
Ask any business owner how much time they spend analyzing cash flow, and you find out which ones are in trouble. The ones who are in trouble are looking at cash flow constantly. The ones who aren’t worried may very well give you a blank stare that screams, “why would I do that?”
We do this backwards. The time to analyze cash flow is before you’re in trouble, so that you can prevent yourself from ever getting into trouble in the first place.
My favorite question is, “Seth, I made $750,000 according to my profit and loss statement, but I only have $300,000 in the bank! Where’s all of my money?”
That question is answered on the Statement of Cash Flows. Ask a group of small business owners when was the last time they looked at a Statement of Cash Flows. Even the ones who are in trouble won’t answer in the affirmative, because most of them haven’t taken the time to learn it, yet it’s so important for business owners to understand where the cash went!
If you are going to spend the time and money getting your accounting information into a system, then you have to set aside the time to look at reports. This is the ultimate output of your system. This is what you are paying for. You’re paying for the software, and you’re paying for the people who manage the information that gets into the system.
Your job is to look at what comes out of the system.
I can send you a bunch of really pretty reports, but if all you do is look at them and remark how pretty they are, you’ve wasted a lot of time and money.
You have to analyze the reports. This means that you look at them, take what you see, and put it into a narrative. Now we’re talking! Now we’re not just looking. We’re understanding.
Next, we can make important decisions about what we see, based on the narrative that we derive from the reports we see.
If cash is king and the lifeblood of the business, isn’t this where we should be spending most of our time?