Welcome to our series on Business Turnaround tips. In the last post, we covered the Profit & Loss statement. If you haven’t that yet, then I highly recommend you do so. In this post, I’m going to do a very basic overview of the Cash Flow statement. In this Cash Flow Statement 101, I will show you the purpose of the Cash Flow statement, how to read one and what you should be looking for in a business turnaround situation. Are you ready? Let’s dive right in.
Cash Flow Statement 101
Purpose: How well you move cash through the business i.e. collecting money and paying out money. At the end of the month, you want to have a ‘surplus’ i.e. money left over.
This is a very basic example of a Cash Flow statement. The Cash Flow is split into 3 main parts:
- Income (i.e. cash collected)
- Expenses (i.e. anything you are paying out)
- Surplus (i.e. how much money you have leftover A negative position is called a ‘Deficit’).
Let’s look at each section in a little more detail.
According to this example, the business has 2 sources of income – UK Sales and Europe Sales. The UK Sales department had £100,000 worth of invoices to collect and the European Sales department had £200,000 worth of invoices to collect. Remember from the Profit and Loss 101 post, these departments may have raised these invoices 1 or 2 months ago but they were now due for collection i.e. getting the money in the bank.
The Income section is not ‘invoices raised’, rather it is money actually collected. So in this example, we’re saying that we collected £100,000’s worth of invoices from the UK department and £200,000’s worth of income from the European department.
Point to note – the amounts collected might not be the total amount. There may still be money outstanding – it just hasn’t been collected yet.
So when the UK department raised the invoice it would show on the P&L as ‘Turnover’ £100,000. But it doesn’t hit the cash flow until it is actually collected.
Expenses are easier. These are the payment we make out when we actually pay them. Don’t forget that you may not pay all your rent in one go. Most likely you pay it on a monthly basis. In this example, we can see the breakdown of the payments we make on a monthly basis. There are, of course, many more payments you will make, but I have kept this example very brief for illustration purposes.
As you can see, Wages are the highest expense you will have. This is typically true for most businesses. That’s why, in a business turnaround situation, one of the first expenses to go is the staff. One of the most popular posts on this blog is ‘How To Fire People Without Feeling Guilty’. Check that out for more information on how to reduce your wages properly.
Again, in a turnaround situation, one of the first places to begin is to analyse the Expenses section on the cash flow. There are always things you can get rid of or reduce through good negotiation. Check this post out on the 3 expenses you can cut quickly. I always advocate reviewing your expenses once a quarter to stay on top of your expenses. If you’re not careful, you can easily fall into the trap of paying for things you don’t need or overpaying for things.
In the example, we a total income of £300,000 and total expenses of £77,000. The difference is your Surplus. So, in this example, we can see that the business has made a surplus of £223,000. That’s a really good surplus! There’s around £200,000 of cash left over after all commitments have been paid.
If the expenses are more than the income, then you will be in a negative position i.e. a ‘Deficit’. If this happens, it means that either:
- You’re not collecting enough invoices
- You’re paying out too much
Key Resource – Finance for NonFinancial Managers, Gene Siciliano
A lot of people can go strictly off the P&L however this is a false economy. The Cash Flow is showing you how well cash is coming in and out of the business. It’s the ultimate leveller of any business and a humbling reality check for some. Ensure that you have a solid team who regularly chase the invoices and minimise the number of overdue payments. Regularly review your expenses and see where you can reduce or eliminate. Cash is king.