As accountants and CPAs we know that very few entrepreneurs and CEOs really understand what's going on with their cash flow. And it doesn't matter how many times you prepare and provide the Generally Accepted Accounting Principles, or GAAP, version of the Statement of Cash Flows.
The fact remains. Most people running businesses (large and small) are confused and frustrated when it comes to understanding and managing their cash flow.
Simplification Leads to Understanding
An approach I have found to be incredibly successful during my career in achieving a new level of understanding for business owners is to get laser focused on simplification. We have to simplify the big picture view of understanding and managing cash flow.
Simplification is an exercise in turning information about cash flow (and accrual basis financial statements) into something insightful. Insight that helps everyone make better financial decisions because they can more clearly see the link between the big decisions being made in the company and how they relate back to the impact on cash and cash flow.
Simplification Meets Common Sense
The way we simplify cash flow is to recognize that understanding cash flow can be simplified and boiled down to answering these two questions:
- What happened to the cash last month?
- What's about to happen to the cash?
After you have closed the books for the month, you should be able to sit down with the CEO and explain the answers to these two questions in a 2-minute conversation. Same with the Board of directors or anyone else in the leadership team who has an interest or an investment in the business.
And if your CEO was going to meet the company's banker for lunch, they should also be able to answer these two questions in a 2-minute conversation.
Your job is to arm them with the answer. (And handing them a GAAP Statement of Cash Flows isn't going to accomplish that objective.)
The Cash Flow Focus Report is my favorite tool for creating understanding about cash flow with business owners and executives.
Try it and see the positive response you get.
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