Hello, entrepreneurs and business owners! It’s been a while since my last newsletter, and I’m excited to get back to work with you. Today, let’s discuss a topic that I know many of us grapple with—cash flow.

As a CPA and Fractional CFO, I frequently encounter a common challenge: businesses that appear profitable on paper but need help with cash flow. You may have experienced this yourself. You see an income statement that indicates success, yet your bank balance tells a different story. How can a business with $100,000 in net income end up with only $10 in the bank? The key to this mystery often lies in understanding cash flow.

Why Cash Flow Is King

In small businesses, cash flow truly is king. It’s the real-life measure of your business’s ability to thrive, pay bills, invest in growth, and seize opportunities. Unlike the income statement, which tells you what you've earned, a cash flow statement reveals the timing and reality of when cash enters and exits your business.

Here’s a thought experiment: If you’ve ever wondered, “Where did all my money go?” or felt blindsided by low cash at month’s end, mastering cash flow might be your missing piece.

One real-life example involved my time as a CFO at a growing organization. Our revenues were increasing at least 70% per year over the last couple of years and we were ramping up for the busy season. We had used all of our resources to build inventory, and sales were just ramping up, and collections were slow. I looked at our cash balance and realized that there wasn't enough in the bank to cover payroll and we had maxed our line of credit. We literally prayed for cash to come in, and over the week, we received big deposits from key customers. That was the financial tipping point for the organization.

How Understanding Cash Flow Can Transform Your Business

In my experience, one of small business owners' most significant missed opportunities is not effectively gaining insights from their cash flow statements. Think of it as a roadmap – it helps you understand where your cash has come from and gone to and enables you to project for the future. Imagine the peace of mind in knowing exactly when money will come in and when you’ll need to cover expenses.

Key Elements of Cash Flow You Can Start Tracking Today

Here’s a quick exercise: jot down your last three months of cash inflows and outflows. Break them into these categories:

1. Cash Inflows - This includes direct cash sales and accounts receivable. Track both immediate income and payments that trickle in over time.
2. Cash Outflows—Here, timing is everything. Are you paying expenses upfront, delaying with a credit card, or paying in installments? Understanding the timing and methods of your outflows can make all the difference in managing cash availability.
3. Timing and Patterns—Cash flow is as much about timing as total amounts. Identifying patterns in your receivables and payables can be enlightening.

Building a Cash Flow Habit

Over the years, I’ve observed that businesses that effectively manage their cash flow undergo a significant transformation. They are better equipped to handle unexpected expenses and have a clearer vision for long-term growth planning. You don’t need to be a CPA to utilize this tool; tracking cash flow will become second nature with practice. This practice provides valuable insights that help you make more confident decisions.

Let this newsletter inspire you to examine your cash flow more closely this month. In upcoming newsletters, I’ll share more tools and tips to make cash flow management simpler and more impactful.

Until next time, stay focused, and remember that mastering cash flow is a decisive step toward sustainable business growth!

Best regards, Terry Smith, CPA & Fractional CFO