It's a Wonderful Life is one of my favourite films. I watch it every Christmas. Played by Jimmy Stewart, George Bailey, the owner of the Bailey Building & loan is devastated to learn that his Uncle Billy has lost an $8,000 cash deposit on his way to the bank. This was the entire cash position of the bank. Because of one careless moment, the Building & Loan is about to not only close its doors, but bankrupt almost everybody in town. The Secret To Improving Cash Flow

Desperate, our hero crashes his car into a tree, and is about to jump to his demise from the suspension bridge into the icy waters below when he hears splashing and a cry for help. George dives in and saves the drowning man. While they're drying off, the rescued man introduces himself as Uncle Clarence, George's guardian angel.

Clarence scolds George, saying it's ridiculous of him to want to kill himself over $8,000, because of course guardian angels have no need of cash! But of course cold, hard cash matters very much when you're in business.

I estimate that 50% of the business owners I work with come to me with cash flow problems. Every month is a struggle, juggling monies to pay suppliers and meet the payroll. They're on what I call the 'cash flow roller coaster.' However it doesn't have to be like this.

If you want to run a successful business, it's essential you become proficient at reading and understanding your financial dashboard.

Your financial dashboard is made up of three important gauges, which combined, will help you to manage your business. They are

  • The Profit & Loss Report (sometimes called a Net Income Statement)
  • The Cash Flow Forecast
  • And the Balance Sheet

[callout]I'm hosting a FREE Masterclass, The Cash Flow Roller Coaster: How to Retain Financial Control of Your Business on Thursday, 4th August at 8pm. Registration is free, but these slots will fill up fast. Book your place HERE[/callout]

These three reports combined measure the vital signs of your business to tell you whether your business is giving cause for concern and showing signs of rapid decline - or worse whether it's on life support. But too many business owners ignore these reports, thinking that they're the provenance of their bookkeeper or accountant. Their job is to make sure you keep accurate and timely records of your business transactions so that they can prepare your taxes. Your job is to read and understand your financial dashboard.

According to the US Small Business Administration, over 85% of small business owners run their company blindfolded and ignore their financial dashboard. That's a shocking statistic! It's no surprise that 40% of these businesses fail to survive to their fourth birthday. The reasons often given are lack of startup cash, unviable products and marketing fail. And this is often the case.

The main reason businesses fail is due to mismanagement and hitting a brick wall in their cash flow. The owner does not use their financial dashboard to understand the state of their business.

The good news is it's a lot easier to understand what your financial dashboard is telling you about your business than you might expect. None of us starts off as an expert. I often tell the story of a potentially epic cash flow fail just one month into my ‘dream CEO role.’ My Finance Manager came to tell me we wouldn’t be able to make payroll that month! Thankfully we sorted the problem out but it could have been a calamity. New to my CEO role, financial management was not an area I was confident about. But I made it my mission to master it because I never wanted to be in a situation when we couldn't make payroll again.

Of the three financial gauges, cash flow is the most important. Here's why.

Cash is to business as petrol is to a car. Every business, just like every car, has its own 'burn rate.' That is the speed at which your car guzzles petrol or your business burns through cash. This is why I set aside the time each week to update my Cash Flow Forecast. It doesn't take long - less than 15 minutes in my case. My Cash Flow Forecast allows me to measure exactly how quickly my business burns through cash, rather than guess.

A Cash Flow Forecast, exactly as the name indicates, measures how fast money comes in and out of your business. Unlike poor George Bailey, hopefully you start the month with a positive cash balance i.e. cash in the bank. Cash comes in from sales, investments or loans. Cash goes out to pay bills and salaries. Your cash at the end of the month is brought forward to begin the cycle again the following month. This makes up your Cash Flow Forecast.

Here are four basic questions your Cash Flow Forecast will answer:

  1. Does my business have enough cash to meet its bills for the next four months?
  2. What expenses can I reduce, and which ones are essential to the business?
  3. How will I plan for my cash needs during lean months of the year, when perhaps there are seasonal variations?
  4. When is the best time to apply for a credit line and how will I manage this?

Unless you operate a cash business and get paid straightaway, your Cash Flow Forecast is not the same as your Profit & Loss Report. If you invoice or have credit terms with customers, cash payments from invoices may not materialise in the month the work was actually booked. So if income (net revenue) does not convert into cash in good time, it could create a cash crisis that threatens the viability of the business. This is why it is so important to update your Cash Flow Forecast on a regular basis.

[callout]I'm hosting a FREE Masterclass, The Cash Flow Roller Coaster: How to Retain Financial Control of Your Business on Thursday, 4th August at 8pm. Registration is free, but these slots will fill up fast. Book your place HERE[/callout]

Join the Conversation

Questions:  Are you using any of the three 'big reports' to run your business? How helpful have you found them? As always, I love to hear your thoughts, so please let me know in the comments box below.

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About Denyse Whillier

Prior to becoming a business consultant and coach, I gained 25 years’ experience in business, including 8 years as a former CEO. This experience is backed up by training at Cranfield School of Management, the UK’s leading business school. With experience in business planning, financial management, risk management, building strategic partnerships, product development, marketing (including PR) plus leading and developing staff teams of up to 150 people, there’s very little I haven’t had to deal with or experienced in business.

To find out more about the different ways of working with me, click HERE. If you’re already familiar with my work and would like to discuss how I can help you grow your business, book a 45 minute informal Skype coffee chat using this link. There’s no hard sell. Just solid advice and a straightforward, honest assessment of whether 1:1 business coaching or business consultancy would be a good fit for your business, the results you can expect and how to get started.

I offer a small number of FREE 15 minute power sessions each week where you can get my help. Click here to book. I also host a FREE private Facebook group, Business Champions.