New year, new you. The changing of the calendar from 2019 to 2020 brings amazing changes, right?
The gyms are full of people who have promised themselves that they’ll stick to their workout this year. We have resolved to change our lives for the better yet again.
This isn’t a post on New Year’s resolutions, although that topic is fresh since we just started a new calendar year. (Also, what else is there to think of in January?!) Rather, this is a post about a resolution to manage your company differently this year.
Back in October when you were thinking about 2020, you most likely at least paid lip service to the new year with some thoughts about what you’d like to do differently in 2020. And maybe, just maybe, you prepared a budget.
Here’s the problem, if your budget is prepared from your financial statements, it doesn’t tell you what you need to know.
It’s a dirty little secret in accounting that the financial statements your CPA prepares are not what management needs to manage their company.
Your financial statements include a balance sheet, income statement and a statement of cash flows.
You know what a balance sheet is; a list of assets and liabilities for your company at a specific date (a snapshot in time). You know what an income statement (also referred to as a profit and loss) is; showing the money earned and spent in a given time period.
Then there’s that nasty little report no one likes called the Statement of Cash Flows. For all its complexity, it really tells you quite little. It purports to show every transaction related to cash but good luck figuring it out.
Between operating, investing and financing cash flows, your mind is probably spinning just trying to trace amounts. The only decipherable information is the beginning and ending cash balance at the bottom.
You know these reports. You’ve at least seen their titles before spacing out when your CPA is talking about them.
These financial reports don’t tell you what you need to know about running your company.
Yes, your tax return is generated based on your income statement and balance sheet. And yes, those three reports with notes are referred to as complete financial statements for the purposes of an audit. However, there’s a divide that you need to know if you want to run a successful company:
Cash is the lifeblood of your company, but financial statements are prepared primarily to track income, not cash.
Many items that impact income do not impact cash. It may come as a surprise that many of the charges and changes in the accounts impacting financial statements that have no impact on cash. It leads many business owners to wonder how they made money if they don’t have cash. The normal financial statements are insufficient to assist you in managing your company because what you really need is a method or report to know what your cash balance will be in the future.
To understand your business you need to track your cash.
Managing your company is more about making payroll and financing the next growth “stair-step” and less about the tax code increasing section 179 for this year. In fact, it has very little to do with taxes. If you’re asking your tax accountant to help you here you may be asking them to speak another language.
You need a report that focuses exclusively on cash.
Use an app to generate a report or just use a spreadsheet. Ideally, you can know the impact on cash for every decision you are contemplating.
What would investing in a new location do to your cash in 12 months? How does a new hire impact cash flow? These are the questions business owners ask and many of them have no way to answer these questions. They have no answers because they’re looking to financial statements for their answers.
To manage your company better, take a page from a public company CFO.
If you are an investor in a publicly-traded company, you may have seen a CFO give a report to analysts on an earnings call. These calls feature a CFO slicing and dicing the impacts of certain changes and translating these to impacts on earnings per share of its stock.
It is fascinating how much information these managers have available to discuss the per-share financial impact of internal or external changes in their business. Hurricanes, earthquakes, tariffs, droughts, product delays, software outages, increased regulation, these CFOs stand in front of a financial firing squad and give a number, usually translated into earnings per share, to the impact from these events.
Within days of a disastrous event, they know how market changes will impact the future financial results in their business.
If these CFOs are expected to know the future impact of uncontrollable events, you need to know the impacts of controllable events.
You’re not a CFO of a public company but you need a system to know what the future holds where it matters most. In the same way CFOs have analyzed the impact of current changes to future earnings, you need a financial tool to allow you to do the same. What matters most is cash flow.
Create a spreadsheet of your cash flows based on your profit and loss.
Now that the prior year is complete, you have 12 months of information to use in preparing your current year cash flow. Start the process of preparing your cash flow projection by using exporting your profit and loss by month report to a spreadsheet. From there, you can make adjustments based on current assumptions.
This can be crude to start but you need to have something to work with. That old McKinsey mantra is particularly true here, “What you can measure, you can manage.”
Time the actual cash received, not receivables. Track all cash in and out of your business and time it. Separate out your debt payments. Remove expenses that don’t directly impact cash such as depreciation and amortization.
Once you have this setup you can start to use it as a live document experimenting with certain hypothetical situations.
Make a resolution to better understand your business. Name your spreadsheet it “2020 Cash Flow” and start tracking and timing the cash in and out of your business.
The more you understand cash flow and track cash, the better manager you will be.