Cash flow, Free cash, and Free-dom
UNDERSTANDING THE FLOW OF CASH
Recently, I’ve been asked to become the CFO for what is evolving into the most compelling, effective, and vertically integrated tech firm in history.
When a CFO comes into any organization, the most important item to understand is how the cash flows – and then how much cash is flowing.
Profit and cash flow can be two different things if you are not taking into account payables that do not apply regularly. A monthly P&L, for example, may show that you profited $10,000. Many entrepreneurs look at that as free cash and may spend it on bills (or a new Ferrari). What you may miss are those quarterly, annual, or semiannual taxes, vendor payments, insurance bills, and other items like a refund that are not accounted for every month. Forgetting any of those has gotten many owners is some financial trouble and/or just not allowed them to optimize wealth creation.
MAXIMIZING THE AMOUNT OF FLOWING CASH
Cash FLOW is the root of sustainability and growth of every business, not just “cash.” At a dental office I consulted for, the dentist revealed that they considered their billings to be real cash and looked at any money left over at the end of the month as free cash. Then, on a regular basis, the poor dentist kept getting hit with bills, surprises, and the financial realities of maintaining equipment. He would have to pull from holy, untouchable resources like personal savings and personal credit cards to pay the bills.
He could not figure out why his net worth was on a downslide despite a fairly successful dental practice. Sadly, in his 60s, he had made millions in his career but was still burdened with enormous debt and the need to work full-time like a kid coming out of dental school.
Entrepreneurs and employed people should amortize annual costs into their monthly P&L account or look at an accounting of these items alongside that P&L to avoid getting the shock of cash versus cash flow. Cash flow is what really remains after every debt or bill, or after the price of doing business is paid. Focus on that number—it’s the only real one!
BUILDING FOR WEALTH
Across the board, so few of clinic and small business owners grasp the true meaning of business ownership. The goal of entrepreneurialism is to gain more and more freedom, wealth, and options for the future over time. If you can safely grasp what your free cash is, you can take that money and grow a future much different then the dentist.
BUILDING TO SELL: CREATING A BUDGET AND MANAGING OFF THE VARIANCE
In a company tightly managing its profits and especially those trying to turn their finances around, the budget is compared to the P & L in order to assess variances between profit and cash flow.
While a small percent of people have such enormous profit margins or a 6th sense about money and claim to get away without doing it, it costs most people the wealth they deserve and/or is catastrophic.
Setting a 12-month budget and having a cash flow analysis, could change your financial future and improve your mental health. This is not rocket-surgery. If you need help putting this together, let us know.
Have fun saving the world
Dr. Ben
