Originally Posted, EIR Corner, Centre4Growth


Understanding your cash flow is critical to understanding the 'fiscal health' of your company, yet I see a lot of CEOs and business owners of pre-revenue and post-revenue companies miscalculate their cash flow.

Cash flow is the difference between money going in to the company versus money going out. Your goal is to achieve a net positive and for that net positive to grow over time. That means that you’re spending less than you’re making and that your profits/earnings stay constant or increase over time.

As the CEO it’s critical that you have a good handle on your cash flow. It’s the only way you can make the right operational and strategic decisions. Decisions that are thought-out and proactive based on accurate knowledge as to whether growth, status quo or contraction strategies should be implemented.

Here are 3 simple steps to stay on top of cash flow:

  1. Don’t be thinking rainbows – it’s about the facts.

    The possibility of revenue is not revenue. That means that you should be weighing closed revenue only. Closed revenue is neither the promise of closed revenue, nor the possibility of closed revenue; it is revenue that has a commitment by the customer (to pay) and by your company (to deliver something in return.) So the possibility of obtaining revenue next quarter or even tomorrow should not be the measure to determine your cash position.
  2. Focus on collection – cash coming into the bank.

    Depending on the type of business model (e.g. advertising, freemium, subscription, manufacturing, etc.) there will be differences in your Accounts Receivable (A/R) cycle. In other words the time between your billing and payment cycle varies based on what you are selling to whom. For cash flow, you want to base your analysis on payments received and not on those committed or invoiced.
  3. Factor in the 'expenditure' pipeline.

    The sales pipeline is not a means to determine cash flow but I do like to consider an expenditure pipeline for cash flow. The reason for this is the pipeline is a possibility whereas expenditures are typically a certainty. By knowing what expenditures you have planned (e.g. D&O insurance renewal, employee bonuses, etc.) and understanding their impact on your operations you can better know your cash position. Having this data also allows you to postpone or even eliminate expenditures based on priority, need and cash flow.

In closing, if you have a good handle on your cash flow then you can effectively run your company.  Having a good handle on cash flow means timely and accurate information so you can make key decisions about things like:

  • Where are the problems?
  • What are the time lags?  And how do we increase them in our favour?
  • How much money do we invest in growth?
  • What kind of growth is reasonable?
  • Do we need to decrease expenditures? Where & by how much?

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