Volume 4 of our Financial Adrenaline series, entitled Follow the Money, is a powerful, visual overview to help you understand the true nature of cash flow. You’ll see why EBITDA is a terrible placeholder for cash flow, why the balance sheet is so integral to understanding cash flow, and why Comprehensive Cash Flow is the best measure to fully grasp all the elements of cash flow in your business.
What is Cash Flow … Really?For many business executives, wrestling naked with alligators isn’t much different than wrestling with cash flow every day, particularly in the last 24 months. A lot of focus may be on the actual fighting just to stay alive … but a lot of it is trying to be sure you know where the alligator is … kind of like trying to “follow the money” as it ripples through your business. You’re certain the alligator went somewhere, but it’s kinda important to know where. Likewise, you’re very clear that there’s cash ON the balance sheet but how it flows THROUGH the balance sheet isn’t so clear.
With positive cash flow serving as THE CORNERSTONE OF BUSINESS SUCCESS, why don’t we take more time to understand it? When we look at financial statements, we spend about 85% of our time looking at the income statement. It’s easier to understand … revenues come in, expenses go out, profits are left over … but why those profits don’t convert to an equal amount of cash … and why so much of it disappears as it flows through the balance sheet … is an enigma wrapped in mystery tucked inside a conundrum for most business executives. Yet, without the balance sheet, it’s impossible to know where your cash is being invested or what levers to pull to get more of it.
That’s why I’m excited to be able to share this video with you … we call it Follow the Money … but it could easily be subtitled, What is Cash Flow … Really?We’ve been looking for a powerful visual way to explain Comprehensive Cash Flow … in simple terms and without financial jargon … so that you can drive improved business performance by focusing on what Warren Buffett calls the “lifeblood of business”. All you really need is a simple, visual way to see how cash flows through your business and where it ends up.
In Vol. 4 of our Financial Adrenaline video series, we’ve included 4 slides that I think will help to unlock some of these mysteries and explain the essential elements of cash flow. You’ll see why EBITDAEarnings before Interest, Taxes, Depreciation and Amortization is a terrible placeholder for cash flow, why the balance sheet is so integral to understanding cash flow, and why Comprehensive Cash Flow is the best measure to fully grasp all the elements of cash flow in your business.
Recently, I was working with a middle market distributor whose company had been using a secured credit line for 30+ years. While the company’s assets were pledged to support the line of credit, there were never any guidelines or covenants that required minimum asset levels to support the line of credit. The company had experienced a good run of prosperous years and it was never a problem … until the recession struck some 24 months ago, their business began to falter, inventories were extended, receivables were slow to come in and the bank began to evaluate the underlying collateral they expected to support their loan.
The company had never paid much attention to their balance sheet. They had a few bank covenants to monitor like minimum working capital and net worth, but they didn’t pay any attention to the change in working capital assets … inventory and receivables … or ever compare it to the size of the line of credit. They got into a deep hole and could only survive the bank’s heightened concern by investing precious personal resources back into the business. Even a rudimentary understanding … and regular monitoring of Comprehensive Cash Flow … could have prevented these unexpected events.
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Be sure to add your comments to this blog post and let us know if this video helped you, if not, why not … and what we can do to improve it. Tell us what else we can do to enhance your understanding of basic business finance principles. Go ahead. We can take it.
FINANCIAL ADRENALINE is the most powerful program available to educate middle market business executives about the value of Strategic FinanceWe define Strategic Finance as the core of business finance principles that drive superior performance at a strategic level and that can be integrated into your everyday business decision making.. Let us help you inject Financial Adrenaline into the cash flow of your business to drive lower risk and sustainable cash flow ... and prevent finance from being the reason for business failure.
Welcome to Exkalibur. I’m Lary Kirchenbauer, President of Exkalibur Advisors, Inc. Please take advantage of our resources to help you build your business ... and let me know what more we can do to serve you.
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Lary has been a tremendous asset to our company. His experience and knowledge provides our young company with the type of financial and business guidance needed to facilitate our continued growth. In addition to Lary's efforts in raising capital for our company, he has assisted Multimedia Live in both extensive business planning, as well as continual ongoing monthly financial and strategy analysis of our business. I have found this to be an invaluable service.
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[...] balance sheet. We recently added a new video to our Financial Adrenaline video library entitled Follow the Money, which is a visual primer that explains this concept. It’s a good place to start, and it only [...]