When cash is king, cashflow must be your business most important focus

In the present business environment cash continues to dominate what a business needs to survives. It goes beyond sales, efficiencies, tax planning and cost savings. Without cash, nothing works and plans cannot be executed.

If there is one piece of information that deemed to be most important for a survival of a business, it has to be the Cash Flow Statement. This is because it gives a true picture of how much cash the company need and is actually generating, independent of all the non-cash expenses you might have. And that is the most important thing you ought to care about when analyzing the overall financial health of your business.

If you pay attention to your Cash Flow Statement you will find there are 3 key sections to it; Cash Flow from Operations, Cash Flow from Investing, and Cash Flow from Financing. Each of these sections will tell you some very important information about your business cashflow position and future.

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·??Cash Flow from Operations

Cash flow from operations is the section of a company's cash flow statement that represents the amount of cash your business generates (or consumes) from carrying out your operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital.

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If the total shows a -ve sign, it means the OutFlow is more than InFlow and hence the red flag is that you need to immediately think about and take business actions on how to reverse it. Remember an OutFlow cannot be a long term trend, otherwise your business will suffocate under cash insufficiency.

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·??Cash Flow from Investing

Cash flow from investing activities is a section of the cash flow statement that shows the cash generated (InFlow) or spent (OutFlow) relating to investment activities. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.

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It is not unusual for the total to show a -ve sign as it mean you are investing to grow your business. Any +ve sign denotes disposal or sale of assets which may signifies asset renewal or disposal due to cash crunch and difficult times. If you are doing all these with a clear intent of what benefits your business, that is fine. Otherwise you business may be going on a slippery slope.

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·??Cash Flow from Financing

Cash flow from financing activities is a section of your business which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.

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If the total shows a -ve sign, it means there is OutFlow which may relate to dividend payments or debts repayments and an InFlow shown by a +ve sign could refer to some equity issuance. Again, such flows must match your business strategy and objectives, otherwise financing considerations that are done without a clear financial strategy will prove to be detrimental.

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From each of the section above, you can make sense of where your cash hot button is. The total of these 3 sections relates to what you have in your bank account. Nothing is further from the truth.

From this Cash Flow Statement alone you will be able to derive a strategic worklist on the following matters; the level of urgency to manage liquidity, the criticality to avoid bad debts, a clear mindedness of not over-committing to big ticket items, be crystal clear on the strategic sources and usage of cash and the potential danger signs that lies ahead if nothing is done.

Can you imagine any other matters that is more important to focus on beyond your current and projected cash position? Many businesses did not survives long not because their products and services is bad or their marketing is poor or they have a weak operations or their market is too small. If the economics of a business, greatly affected by cashflow is not working out because of poor planning and strategic thinking, nothing else matters.

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