Philip Campbell's Blog

Your CFO to the rescue: Solving the mystery of cash flow – Part 3

In Part 2 of this series, I revealed how powerful an interactive, visual cash flow dashboard can be in helping the CEO, lenders and investors understand what’s going on with your Company’s cash flow.

The three tools I have used effectively over the years are:

1. A visual, interactive cash flow dashboard
2. The Peace of Mind schedule
3. The GAAP cash flow statement

We looked at the cash flow dashboard in detail in Part 2.

Now it’s time to talk about item #2 on the list.

The Peace of Mind Schedule

The Peace of Mind schedule was born back when I was a CFO of a nice little company that, unfortunately, had one very nasty cash flow problem. 

About a year after I became the CFO, we began negotiating a major restructuring with our primary lender.

One of the challenges in creating the new payment terms was that the business was highly seasonal.  Net income was great in certain months. But that’s not how the cash flowed through the business.

I created the Peace of Mind schedule format to help the lender more clearly see the difference between the stronger net income months and how the cash actually flowed, the impact of seasonality on our cash flows, and why we had to maintain some fairly large cash balances at certain times of the year in order to get through the seasonally slower months.

It presented the information to them in a way that made it super easy for them to understand exactly how our cash flow worked and why their previous demands for payment terms were totally unrealistic.

We eventually got the restructuring we wanted and got the repayment terms set at levels we could afford and that we could live up to.

(I wrote a chapter in my book Never Run Out of Cash about the story of how the Peace of Mind Schedule came into existence. I provide a free copy of that chapter on this page.)

The schedule is designed to show twelve months of cash flows next to each other. The first six months are actual results (in the image above).

The schedule helps answer the question “what happened to the cash”. The next six months in the schedule are going to be our projections. The projections are going to help us answer the second question “what’s about to happen to the cash”.

Here’s How the Schedule is Setup

The schedule starts with the beginning cash balance for the month.

In section 1, I bring in a summary version of the income statement. 

Here's an important point I'd like you to jot down before we continue.

This is not a sources and uses of cash schedule.  This is not a picture of the flow of cash in the door and the flow of cash out the door. That’s a very important point. You want to help people relate to profitability from the income statement as part of showing them each of the key drivers of cash flow for the month.

You don’t want to try to present a cash basis view here. That will defeat the whole purpose of providing education and insight to the users of your monthly financial statements.

In section 2, I bring in your debt service payments. These are the payments you make on loans with the bank or other financial institution who has loaned you money. The amount here is the total payment.

Both principal and interest are included so it is clear how much cash is leaving your business for the purpose of servicing debt. Any borrowings you receive in a particular month would be included in this section.

In section 3, I bring in your capital expenditures. This is the cash you invested in various capital assets during the month.

Section 4 is what makes the schedule so unique and powerful. This part of the schedule is primarily focused on capturing the various “timing differences” created in your income statement by the accrual basis of accounting.

Some of the biggest timing differences in your business will likely be related to accounts receivable, inventory, and accounts payable.

This section helped me teach management and lenders the difference between the revenue number in the income statement and the cash we actually collected during the month. It’s a great education tool.

Shining the Light on Receivables and Inventory

It’s also a great way for you, as the CFO, to get your staff focused on setting targets and goals around how much cash you should be collecting on receivables in any given month.

I have found this to be incredibly effective in getting people focused on collecting receivables (in addition to working the accounts receivable aging reports).

Same thing goes for inventory.

It’s easy for people to lose focus on the amount of inventory the company is actually buying each month. Shine the light on it like this and you find that management starts paying a little closer attention to what’s going on with inventory (since we all know inventory is where lots of dead bodies are buried).

Then the schedule computes the ending cash balance for the month.

All on Two Pages

On two pieces of paper we have captured all the drivers of cash flow.

We will use this same tool to create our cash flow projections for the coming months right next to the actuals. (We’ll talk more about the projections in an upcoming post).

My next post in this series will focus on the third component of your cash flow toolkit – the GAAP cash flow statement.

 

Note: If you want to learn more about the Peace of Mind Schedule and how to implement it in your business, it’s the focus of my book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore.

Your CFO to the rescue: Solving the mystery of cash flow – Part 2

In Part 1 of this series, I introduced you to the two questions at the heart of understanding and managing your cash flow.

You need to have the answers to these two questions in order to properly manage your cash flow and make smart decisions about how to use your cash.

1. What happened to the cash?
2. What’s about to happen to the cash?

 And I shared the fact that your CFO has an important role to play in answering those two questions - every month.

Now let’s talk about the tools and approach I have used over a long career as a CFO.

They are proven and time-tested. I hope they work as well for you as they have worked for me and the companies I’ve implemented them for.

A Chance for Your CFO to Shine

Let’s say you are the CFO. Here’s your chance to shine. Here’s a perfect opportunity to add tremendous value for your CEO by taking a very proactive approach to answering these two questions.

And you will also be adding value for the company’s lenders, shareholders, and the Board of Directors. Every one interested in, or invested in, the financial success of the company will value a straightforward approach to answering these two cash flow questions.

Here are the components of the toolbox you will need:

1. A visual, interactive cash flow dashboard
2. The Peace of Mind schedule
3. The GAAP cash flow statement

While it’s possible to use either of these tools alone to accomplish the objective, I generally use all three in tandem.

Each one helps accomplish a little different objective. They are especially effective when used together.

The Cash Flow Dashboard

One of the challenges in presenting information about cash flow is there is no single number you can present that tells the complete story.

Understanding cash flow is about revealing what happened in the handful of key drivers of cash flow. Of course, the more numbers you have to present to the CEO or others, the harder it is to make the information understandable.

That’s especially true since a change in any of those key drivers does not necessarily mean something good or bad on its own.

Many of the drivers must be understood based on the impact they have on each other.

This is where the cash flow dashboard can pay big dividends for you. It can harness both insight and focus in a very unique way.

 

Click on the Link to See the Interactive Dashboard

Take just a minute to look at the actual interactive cash flow dashboard in action here. It is a very unique tool in that it is interactive and uses visual cues to communicate understanding.

When you click on the link to the dashboard, you will see how you can mouse over the various time periods on the left and see each driver of cash flow for that period. The dashboard instantly, and interactively, displays the information graphically.

This kind of tool turns financial data into visual insight.

It uses red, yellow, green indicators so the user not only sees the data, but they can also see whether the data is good, bad or in between. The visual cues promote understanding.

There are a number of qualities that make this dashboard unique. One is the section in the top center labeled Components of Cash Flow. You can see graphically how each of the various drivers of cash flow impacted cash. You can also mouse over each bar and see the exact dollar amount.

Most business owners look at net income and believe that if they are making money than they are generating cash.

It would be nice if profits equaled cash flow – but they don’t.

You have to have visibility across all the drivers of cash flow if you are really serious about managing one of your most important assets. You can’t just focus solely on the income statement.

It also includes a view into gross margin and commission expense which are important drivers of cash flow in the business I created this dashboard for. It provides two views into accounts receivable. Both the aging of accounts receivable and the DSO (the number of days of sales that are sitting in receivables) are important drivers of cash flow in any given month.

A Second Cash Flow Dashboard Example

When you click on the link to the dashboard, you will also see a second cash flow dashboard I created for a franchise company. It makes it possible to mouse over the various franchisee locations on the left and see each of the key drivers of cash flow.

This is a great view when you have locations or businesses that are similar and you want a slick way to convey how each location is doing from a cash flow and key drivers perspective.

It makes the cash flow information fun and interesting to look at. That is a key to getting non-financial types to invest some time in discovering what the dashboard is telling them. It makes the information much more accessible.

It demonstrates that you have more than just spreadsheets and general ledgers in your financial reporting arsenal.

It facilitates the discussion you want to have about the different drivers of cash flow. It helps you provide the answer to the first cash flow question: “What happened to the cash?”

Next Step

The dashboard sets the stage for the other two tools we will be using to answer the two cash flow questions.

I have found that executives, and others, become more willing to go deeper and get more involved with the other tools once they begin to understand the handful of key drivers of cash flow.

They come to see that the having the answers to the two cash flow questions makes running the business so much easier.

A cash flow dashboard is a very nice tool for helping you harness the power of turning financial data, in this case financial data about cash flow, into real insight.

In Part 3 of this series, I will share with you the next two tools for managing cash flow: The Peace of Mind Schedule and the GAAP cash flow statement.

Your CFO to the rescue: Solving the mystery of cash flow – Part 1

Have you ever tried to define the term “cash flow”?  Or looked it up in the dictionary online?

In my last post on why you feel so uncomfortable managing your cash flow, I shared the statistic that 82% of business owners don’t feel like they have the cash flow of their business under control.

There is a “secret sauce” of sorts you have to understand in order to properly manage your cash flow.

In this series of posts, I’ll share with you the ingredients of that “secret sauce”. It will help you better understand what it takes to get your arms around your cash flow.

The Many Definitions of Cash Flow

One of the primary challenges in managing cash flow is that cash flow means different things to different people.

Here’s the definition of cash flow in Merriam-Webster’s online dictionary:

“A measure of an organization’s liquidity that usually consists of net income after taxes plus noncash charges against income.”

Notice that this definition is focused exclusively on numbers in the income statement. It does not refer at all to cash used for debt service, capital expenditures, increases or decreases in working capital, equity put into the company, and certain other sources and uses of cash.

It’s more accurate to say that this definition is intended to give a general idea/estimate of the ability of the company to generate cash. It doesn’t attempt to help you understand what happened to your cash though.

Here’s the definition of cash flow from Wikipedia:

“Cash flow is the movement of cash into or out of a business, project, or financial product.

… cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows.”

So this definition is much broader in scope. It goes past just what lands in your income statement. It attempts to include all the money flowing into and out of the company.

It also says it “is a generic term used differently depending on the context”. Hmmmmmm! Interesting “definition”.

And there are plenty of other definitions of cash flow out there as well 

It Comes Down to This

The key, given the fact that cash flow has many different definitions, is to make sure your focus is on what really matters when it comes to managing your cash flow and making decisions about how to use your cash.

Here’s what it all comes down to. Each month you need to know the answers to these two questions.

1. What happened to the cash?
2. What’s about to happen to the cash?

One of the very important jobs of your CFO, and your accounting department as a whole, is to have the tools and processes in place to provide you the answers to these two cash flow questions. And provide them to you in a way that is clear and easy to understand and digest.

It’s also their job to make sure that your lenders and investors have these two answers each month as well. (That’s why I love the Monthly Confidence Package so much. That’s one of the important reasons I created it.)

The Challenge

So here’s where it gets challenging (and your CFO has to think somewhat creatively and strategically as a result).

Here’s a great quote that I included in my book Never Run Out of Cash. It’s called Meyer’s Law.

“It is a simple task to make things complex, but a complex task to make them simple.”

I love that quote because it captures the essence of the challenge that your CFO faces in providing everyone a clear view into question #1 “what happened to the cash”.

The truth (part of the secret) is there is no one number you can look at to measure cash flow. There are a handful of key drivers of cash flow in any particular month.

That means that to understand what happened to the cash, you have to see and understand what happened in each of those key drivers of your cash flow.

Insight and Education

Your CFO has to go past just providing information and take a more creative approach to providing you insightful information about cash flow. And do it in a way that is as much educational as it is informational.

I have found several different approaches and tools that have worked well for me over the years.

I’ll talk about each of those in my next post (Part 2).

Here’s why you feel so uncomfortable about managing your cash flow

Are you feeling good about how you manage the cash flow of your business? Can you explain what happened to the cash at the end of each month?

I did a survey of business owners when I wrote the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. I knew from my work as a CFO and as a consultant to business owners that few people are really on top of their cash flow.

The first question was: Do you feel like you have the cash flow of your business under control?

82 % said No.

That’s a big problem when you consider that pretty much everyone in business knows that Cash Is King! That cash is the lifeblood of the business.

So why is it that such a huge percentage of people understand how important cash is but 82% say they don’t feel like they have their cash flow under control?

The next question I asked was: Do you know what your cash balance is expected to be six months from now?

79% said No.

That means that as you are faced with important financial questions each day like:

• Should I buy or lease the new equipment I need?
• Can I repay the debt I have on time?
• Can I add a new location without putting a strain on my finances?
• What’s the financial impact of implementing my growth plans for the business?

When you have questions like that, but no answers, then you are left to wonder and worry about what’s about to happen financially.

The Secret

If there is a secret to understanding and managing your cash flow, it lies in being able to answer the second question. When you don’t know what you expect your cash balance to be over at least the next six months, then your cash flow will always be a mystery to you. And you will always be uncomfortable understanding and managing your cash flow.

As I said in the book, it really is absolutely impossible to manage your business intelligently if you don’t have cash flow projections.

Do you know what your cash balance is likely to be six months from now?

3 really good reasons to put your focus on cash

I believe strongly that where you put your focus has a lot to do with how successful you are in business. And cash is one of those parts of your business that warrants a great deal of your time and attention (and focus).

Because if the cash ever runs out, all your hard work goes right down the toilet. Your dreams of financial security and all those things that motivated you to get into the business come crashing down.

Even if money's not your primary motivator, you still have to protect your cash.

Here are three good reasons to focus on getting your cash flow under control.

Reason #1

The first is that failure hurts. It creates pain and suffering, it sets us back, and it generally makes life miserable.

And you know, failure is not one of things that is talked about much because it’s a bit uncomfortable for most people.

But I believe it’s really important to take a quick look at what failure is all about so you can be clear in your mind about why you don’t want to go there. Then you can recommit yourself to creating a successful business. You can put all your time and attention on creating a business that takes care of you financially.

And the definition of failure in business is… running out of cash.

This has NOTHING to do with greed. It’s about making sure the business is alive and healthy so it can deliver on the objectives as you have defined them.

Reason #2

The second reason I believe it’s so important to get focused on cash is it’s very important to understand the negative and destructive impact that worry will create in your life and in your business. 

Specifically, I’m referring to worrying about your cash flow or worrying about the financial side of your business.

I guarantee your business will suffer, and you will suffer personally, if you ever get caught up in the negative cycle of worrying about your cash flow.

Whether you truly have a cash flow problem or not is not really even the primary point, just the fact that you are worried is a sign from above that you don’t have your cash flow under control.

Let me show you what I mean by walking you through how this cycle usually plays out so you can see why this is so important. I can’t tell you how many times I’ve seen it play out in other companies.

1. Cash starts to get tight. When cash runs low, you get pulled into decisions like: Which vendor are we going to delay payment on? How are we going to make the payroll? Are there any expenses we can cut immediately? What are we going to tell the bank? Is this problem going to get better or is it about to get a lot worse? And a long list of other questions.

2. Next, worry sets in. Not being able to pay your bills on time is a TERRIBLE feeling. You feel like a failure. Your mind starts to runs wild. You start thinking of all the bad things that might happen if the business collapses. It’s a scary and uncomfortable feeling.

You’re unsure about how long the problem’s going to last. You don’t have a clear sense whether it’s about to get better or it’s about to get worse.

After that, you’ll find your focus has shifted dramatically. Now you’re spending most of your time trying to put out the cash flow fire. You can’t focus on doing what you do best— which is taking care of customers and making more money - because you’ve now become the chief firefighter.

It’s more difficult now to be out working with customers. It’s harder to coach and train your people. Even when you do get out there, you’re still thinking about the cash flow fire raging back at the office. The time you spend with your customers and your people is far less productive.

Calls about invoices and payments that would normally go to your bookkeeper or your accounting department are now going to you. Vendors are calling, angry and frustrated, because they’re not getting paid on time, if at all. They want answers—and they want them from YOU.

The vendors are also starting to question whether you’re going to make it or not. They’ve seen other companies go down the same path. They’ve seen the failure cycle before. They start asking you what’s going on in your business: “Are you going to make it? When can you pay us what you owe?”

3. And finally, if it’s not fixed real fast, the business fails. When this cycle sets in, it’s VERY difficult to reverse. And as it progresses, it picks up speed, diverts you away from what you do best, and eventually you crash into a brick wall (going REALLY fast).

That’s when the nightmare really unfolds. The pain and suffering of failure becomes a day-to-day reality.

Reason #3

The third reason I believe it’s so important to get focused on cash is because it is the essence of creating financial success. It’s probably true that money doesn’t buy happiness but… it does buy:

Good health care

A nice to live or retire

Nice stuff for your children and grand children

College for your children and grandchildren

Corporate jets to cruise around the country (just kidding… well sort of)

… and a whole lot of other things that make life more fun and enjoyable.

Success

Your success in business will ultimately be determined by the degree to which you create, and hang onto, your cash.

Everything eventually comes down to how much cash you have and your ability to convert your assets into cash over time.

Do you have the cash flow of your business under control?

Two simple questions are the key to managing your cash flow

I became a CPA way back in 1985 (yes, I’m old)!

So it’s OK for me to pick on the CPA community a bit. The accounting and CPA community has done a poor job of helping business owners and entrepreneurs understand and manage the cash flow of their business.

It’s easy for them to get overly focused on just looking at their product as a set of financial statements or a tax return and pass up the opportunity to help you really understand and benefit from the story behind the numbers. To provide you some real insight you can use to make your business stronger and grow it with confidence.

Oftentimes you’re not getting what you need in a way that is simple and easy-to-understand.

Taking Control is About Answering Two Questions

Everyone growing a business is facing some of the same challenges. The reason so many people don’t really know what’s going on with their cash flow is because they have no good way to create visibility and transparency around all the different drivers of cash flow.

There is a great quote I put in my book Never Run Out of Cash that says, “It is a simple matter to make things complex, but a complex matter to make things simple”.

Taking control of your cash flow really boils down to being able to answer two very simple questions.

I’ve done the hard work to narrow cash flow management down to the two critical cash flow questions.  Because when you have the answers, you instantly free yourself from that nagging worry and concern floating around in your head when you know you’re flying by the seat of your pants.

Here they are:

1. What is my cash balance right now?
2. What do I expect my cash balance to be six months from now.

Ask yourself these two questions right now to get a quick gauge about how well you’ve got the financial side of your business under control.

So what’s your answer to the two questions?

Set a meeting with your CPA to talk about those two questions. It's a great step toward taking control of your cash flow.

Is there a hole in your (financial) sidewalk?

I have a neat little story for you that captures the essence of what managing the cash flow of your business is all about.

The story comes from a book by Portia Nelson called “There's a Hole in My Sidewalk”. The author of this story was asked to write a summary of her life. And it had to fit on one page and be no more than five chapters long.

While you read this story, I want you to take a minute and get a vivid picture in your mind of what she is describing. I want you to see this story in your mind as the story of her life unfolds.

AUTOBIOGRAPHY IN FIVE SHORT CHAPTERS

Chapter 1

I walk down the street.

There is a deep hole in the sidewalk.

I fall in.

I am lost . . . I am helpless.

It isn’t my fault.

It takes me forever to find a way out.

Chapter 2

I walk down the same street.

There is a deep hole in the sidewalk.

I pretend I don’t see it.

I fall in again.

I can’t believe I am in the same place

But it isn’t my fault.

It still takes a long time to get out.

Chapter 3

I walk down the same street.

There is a deep hole in the sidewalk.

I see it is there.

I still fall in . . . it’s a habit.

My eyes are open.

I know where I am.

It is my fault.

I get out immediately.

Chapter 4

I walk down the same street.

There is a deep hole in the sidewalk.

I walk around it.

Chapter 5

I walk down another street.

 

That’s the story of her life!

And it also describes the essence of what managing your cash flow is all about. And really what managing the financial side of your business is all about.

You can do a poor job of it and let it hold you back and pull you down and make it harder to be successful in business. Lots of people let the financial side of their business become the hole in their sidewalk.

The result is the business becomes more difficult to manage than it needs to be.

Time to Walk Down Another Street

The alternative is to be smart about financial management, keep it simple, and walk down another street altogether when it comes to taking control of your cash flow.

Think for just a minute about all the blood, sweat, tears, dreams and MONEY you’ve invested in your business.

You owe it to yourself, and all the people who are depending on you, to be smart about how you manage the financial side of your business.

 

Note: My Freedom From Student Loans Blog is up now. Check it out if you or your children will be going to college or if you (or a loved one) have student loans. It’s there to help you.

Creating confidence by sharing the key drivers of your financial performance

The typical monthly financial reporting package just provides the basic financial statements (although many tend to leave out the cash flow statement which is a big mistake).

You provide real insight for the user though when you help them see and understand the handful of key drivers of your financial performance.

It promotes a deeper understanding of your business. It makes them smarter about how your business generates results.

It helps them to more easily understand the parts of the business that have the most impact on your financial performance.

I like to provide a Monthly Confidence Package to management and lenders and the Board of Directors.

It’s a great confidence and trust builder.

You should try it!

The new Freedom From Student Loans blog is up and running

I’ve mentioned to you in previous posts that I was launching a new blog – Freedom From Student Loans. Well, now it’s up and running and I’m ready to share a very important message with you.

I can’t tell how excited I am to be sharing this information about student loans with you. I truly believe that I can help you avoid some serious financial mistakes in your life as you work on getting your education, or helping your kids get an education.

My whole purpose with my student loans blog is to convince you to seriously consider outlawing the use of student loans in your family.  I want to show you why it is so important that you avoid student loans and that you do everything in your power to convince your children to avoid them as well.

It could be the smartest financial decision you ever make.

And it could be one of the most important, and long-lasting, financial lessons you ever teach your kids. What a powerful gift that would be for your kids and their family. To live their life without the anchor of student debt dragging them down is a valuable gift indeed.

I Want to Help

I'd like to see you win financially in life. Freedom from student loans is an important part of your journey toward winning in life. I hope I help in some small way in your success along that path.

Be sure to drop your email address in the box at the top right corner of the blog so you can get these blog posts delivered direct to your email inbox shortly after I post them. I will post two to three times per week.

And please share the blog with your friends and followers who you think will benefit from my message of freedom from student loans.

Here’s a link to sign up for email updates to that blog.

And here’s a link to the new blog.

I hope you enjoy it.

There is a lot of cash hiding in your inventory - time to unlock it

Have you taken a good, hard look at your inventory lately? Inventory can suck a lot of your cash into it if you are not watching it like a hawk.

Any dead bodies sitting (so to speak) in there?

Any old, tired products that need to be sent on their way (marked down and sold)?

Most companies are sitting on inventory that is not worth as much as it shows on their balance sheet. It’s kind of a way of avoiding the reality of your true gross margins. But in most cases, if old and worthless inventory were written off, the real gross margins you are achieving are less than what you think.

Maybe a lot less!

Take some time to really peel the onion on what makes up the inventory balance on your balance sheet.

You may unlock a lot of cash by shining the light on that dark little place some of your cash is trying to hide.