Cash Flow: The Anatomy of Your Business
Cash Flow is the lifeblood and the anatomy of your business.
It is imperative to maintain a healthy flow of cash in and out of your business. This is so that you are able to pay employees, suppliers, rent, taxes, and other operating costs on time. As a result of having cash on hand, you may also be able to put funds back into your business. There are times when you will need to spend money to make money, such as on things like tools and technology, marketing, branding, and personnel. In this instance, the business invests its own funds and buys assets to generate additional revenue to benefit the business.
In a business, cash flow refers to the amount of money that comes in and leaves the business. You should consider it one of the most reliable indicators of your business’s financial health. When your business has consistent, positive cash flow, it just feels right. Like everything is working properly. When the balance of cash flow is off, your business feels “clunky”, like you are always waiting on money to come in to do something else and enhance operations.
What is cash flow management?
The concept of cash flow management refers to the way that you manage your operations. This is to not only keep more cash in your business but to grow operations and scale as well. The practice is ingrained in everything you do, from your invoicing process to your relationships with suppliers, vendors and investors. There’s no single way to do cash flow management, but it must be woven into the fabric of your daily operations.
What is the difference between cash flow and profit?
Your business’s cash flow and profit are key performance indicators, which are tied together by your cash conversion cycle. When reviewing your cash flow, it’s crucial not to confuse profits with cash flow.
· Cash Flow: This is the actual amount of cash that moves through your company. It should be derived from sales and used to pay operating expenses each month.
· Profit: Profit is one of the key metrics used to determine a business’s success. It is defined as the amount remaining after deducting the costs needed to generate revenue. The amount of money that should be left over after you pay all expenses. Profit can be calculated by taking the revenue and subtracting the expenses. If the amount of revenue coming into your business is the same as what is necessary to pay your expenses, you are not making a profit—you are surviving.
What is more important for a business, cash flow or profit?
In order for a business to succeed, cash flow and profit are both crucial factors. It is critical for a business to make profits and maintain a positive cash flow in order to succeed over the long run.
Profit is your grade for the period. Did your business make money or not? Cash Flow is actual cash that tracks actual cash in hand and the cash that flows in and out of the company. You can have a profit, but not have any cash. Mainly because profit does not consider the timing of receiving payment for the sale as sometimes it takes time to move into the business account or it might be in the contract that you are only paid after a certain amount of time. The ability of a company to remain functional depends heavily on the ability of its cash flow to maintain a steady flow of funds. Quite simply, you can spend cash, but you can’t spend profit.
Real-time analysis of why Cash Flow and Cash Flow Statements are so significant.
The ongoing event of FTX is still being unravelled. However, it reinforces the deep belief that Cash Flow and Cash Flow Statements are so imperative to understand; for the business itself, for its investors and for individuals. Customers have fled the exchange over fears about whether FTX had sufficient capital. FTX financial statements provide useful quarterly and yearly information to potential investors about the company’s current and past financial position, as well as its overall management performance.
After FTX the second largest crypto-exchange platform agreed to sell itself to rival crypto-exchange company, Binance. The deal fell through while Binance was completing its due diligence on FTX’s cash flow and balance sheet. FTX’s balance sheet is said to have been incomplete and not granular. The balance sheet published by the Financial Times roused disbelief and amazement in financial circles. “It is unfathomable that FTX’s balance sheet is as bizarre as it is, given the size and scope of their businesses”. Binance, another major player in the cryptocurrency market pulled the plug and tipped FTX enterprise into a full-blown crisis after having looked under the bonnet and said that “it could no longer push ahead with the deal”.
Since their cash flow statement isn’t available, we are able to get a sense of the problem at FTX by taking a look at this visualization of their leaked balance sheet. It’s clear to see that FTX was highly leveraged and had nearly 9 times the amount of liabilities than clear liquid assets. It’s easy to see that FTX lacked the cash needed to weather a change in the business environment.
Additionally, if you’re ever looking to better understand Cash Flow and/or understand how to read the anatomy of the business, reach out to Cash Flow Mike. We will be happy to help and provide you with bespoke tailored training to help you fill this important void
P.S. Whenever you’re ready… here are 4 ways Mike can help you improve Cash Flow in your business.
- Grab a free copy of my book:
In The 7 Minute Conversation, you’ll learn how to analyze any company’s financial statements in 7 minutes or less. It includes a super valuable lesson on controlling expenses. — Download Here.
- Join the Clear Path To Cash – Mining Your Business For Hidden Cash Facebook Community:
This is our new Facebook community where business owners who are using the concepts taught in The Clear Path To Cash can share lessons learned and receive advice from my team and other members of the community. — Join Our Facebook Group.
- Participate in a Live Virtual Clear Path To Cash Seminar:
There are some people who prefer to learn concepts through self-study through books or video series. For others, such as myself, it is necessary to be in a classroom environment and to be guided through the concept. We offer a Virtual Seminar each month. It takes only three hours each day for two days, during which you will learn about The Clear Path to Cash Program’s eight steps.
I am so passionate about this one that I teach it myself. — Virtual Seminar.
- Work with me and my team privately:
If you’d like to go over something outside of a group setting, no problem. All you have to do is click this link to schedule a 15-minute Triage Call. In 15 minutes, we see if my team can help you with your problem. Sometimes we can give you some advice on the spot, other times we will invite you to a longer Burning Issues call, where we dig into the issue a little deeper and give you some great advice. Even if we don’t believe our program is a good fit for you, we try to connect you with the right professional from our network of friends. — Schedule Your Triage Call.