The key for corporate finance is the business cash flow - First it´s important to start from scratch. Note: this article is intended for Non-Financial Business Owners / Founders
Juan Pablo Morales
March 31, 2021
What is Cash Flow?
Cash Flow (CF) is the amount of money on an organization, increase and/or decrease. Normally, we measure the cash generated and consumed in a specific interval of time, with that track there´s a chance to analyze the historic periods, the status quo as well as forecast the flow behavior for the next periods.
Normally, businesses are run without considering the liquidity business have, and that is a huge mistake. Just to point out an analogy, is like riding a horse blind and without hands, you will never know what´s next in the horse´s path! Sounds crazy… but it´s completely true.
Business owners should be cash flow driven. Checking and controlling the liquidity it´s the key to manage the operations correctly. Please review these scenarios that support my thesis:
Profit is positive, but the receivable turnover is superior to 120 days. That means on average a customer takes almost 4 months to pay. The lack of cash will force the company to increase their liabilities or run off chances to pull out a credit.
Profit is negative, but the forecast suggests that in 6 months the business will be in break-even. It´s important to analysis if there´s a way to cover the operation within this period.
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas”- Michael Dell
What is OPEX? One of the cash flow components
The operational expenditures (expenses) are all the business needs to run correctly.
The OPEX might and should be and input for the cash flow, so once your domain and control the OPEX the cash flow will be easy to forecast and analyze.
Lastly, here are some interesting tips about cash flow:
CF is considered the key to corporate finances.
Life should be easier if you forecast the cash flow behavior (at least for the next 2 -3 months).
PLEASE always analyze worst case scenarios with your CF, to protect your business operations.
When forecasting the CF, always be conservative
Pay debts earlier.
Assume delays on receivables.
Assume investments will have a significant lower return than expected.
Always ask the questions:
How could I obtain resources for my business? In good times as well as on a crisis.
Which are the correct investments for the long term of my business?
How do I manage properly my cash in the short term, avoiding problems with obligations?
“Making more money will not solve your problems if cash flow management is your problem.” – Robert Kiyosaki
For your business, please DO NOT:
Be positive predicting your incomes, what if the expected income enters a month later? How you will be able to meet the operations requirements?
Underestimate the expenses, specially the OPEX. It´s important to measure on a weekly basis the costs and execute a proper forecast for every single expense line.
Increase liabilities/assets ratio in good times, what if there´s a crisis and you require financing?
Forget to evaluate and maintain your possible financing streams, the key is to always have the “hammer” to break the in case of emergency window.
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