640: How To Manage Money In A Business

In business, money is constantly moving. A cash flow statement is a bit counterproductive.  As the cash flows, we can see trends and movement.  The moment we snapshot the flow of cash into a static cash flow statement, the cash stops flowing. Taking a snapshot of a rushing river means the river is no longer rushing; it is still.  You can clearly see the river, the level, the color, and the shape, but the rushing-ness of the river is lost in the stillness of the snapshot. The mass publishing of the now infamous story of Chris McCandless documented in John Krakauer’s book In The Wild has led to a surge in the number of me-too explorers who wish to track McCandless’s fateful footsteps.  To reach the famed bus that McCandless made home explorers must trek through and across the Teklanika River.   After safely crossing the river many inexperienced explorers fail to take into account that rivers trough and crest often at unpredictable times leading to many of these post-McCandless explorers stranded in need of rescue, or in some cases left for dead.  The metaphor is not much different in the trough and cresting of the cash in your business.   With a little preparation, you can begin to have greater insight into the reality of the future tides of the river of your business.   Static financial statements and reports are incredibly valuable, including the cash flow statement, and yet still can be of only momentary help to a business owner who lives in a dynamic, constantly moving world.   The statements and reports themselves need a means of tracking the flow, the peaks and troughs, and the standard deviation of that volatility so we can make a point-in-time-decision in the midst of a constantly flowing market. The Executive Leader is looking to create proximity to motivate a team to pursue the named future you see, therefore must be able to cut through the financial fog and pay attention to reliable instruments that are always calibrated within the values of the business. Just as in an airplane cockpit, the pilot maintains a panoramic view of the horizon (vision) the Executive Leader must also build in a panoramic view by which to view the financial health of the business that is tracked with repetition, predictability, and meaning. Three tools will aid the Executive Leader in having such a panoramic view past, present, and future. First, the well-tested profit and loss statement (P&L;) provides a still shot of what has-been with one major caveat; the data you retrieve is only as helpful as the data that has been input. The P&L; helps you to understand your Cost of Goods Sold which in turn immediately helps you to understand what Mike Michalowicz calls your Real Revenue.  Your COGS is a number that theoretically goes away if sales goes to zero, everything “below the line” would continue as-is and gives you a great snapshot into your other expenses or overhead. A great monthly exercise is to simply march down the P&L; and see if any of the percentage numbers have changed from month to month, quarter to quarter, or year over year.   The net income number on the bottom of the P&L; is nice, but let’s be clear, it is not an actual reflection of how much cash remains in the business.  It drives me crazy when someone says, “Congratulations, you made X in net income.”  Your net income seems to be more advantageous regarding your taxes than it does in showing your actual cash profitability (the funds you really have access to).   You could not take your P&L; to the bank and ask to withdraw your net income…I know it’s silly to say, but that is how many think of the net income number.  Your P&L; is more of a value of past “actuals” related to income, real revenue, costs, and expenses…it is the history less for your business. For the present, merging two ideas has been of significant value to so many business owners making the pivot to Executive Leadership.  The first of those two is the subdivision of cash entering the business.  When a dollar comes in, that dollar should be physically subdivided into separate accounts or expense homes where you are able to see what cash is actually available to the business for real-time decisions. You might begin to feel a draw to defend the balance sheet, or the cash flow statement, or a simple spreadsheet as a means to do the trick.  Here is the major problem, most business owners and executive leader (heck, most accounting professionals) struggle to keep up with the daily tracking of cash on a spreadsheet.  Also, the balance sheet or cash flow statements are static, not following the flow of cash (different meaning than a cash flow statement).   When the cash is subdivided into multiple bank accounts the decision-making for the executive leader has a much faster turnaround because whatever is in the account is what we have to work with, period. Each week, a team member documents the balances of those multiple accounts and begins to watch the peaks, troughs, and up/down deviations.  Sure, you can always log into your bank account or quickbooks to check today’s cash balances…but what about watching those balances at hundreds of waypoints over the years to see trends?   The Level Two Dashboard is a tool (Level One is your online subdivided bank accounts) that requires about 5 to 10 minutes of work each week and provides hours of time saved and in most cases a retention of money earned without losing it to the thief of leakage.  The more you have access to, the more prone to leakage.   The Level Two Dashboard also has options to track receivables, near-term payables, and a water-level number called the all-in/all-out number. This number answers the question, “if we grabbed all of our available cash, grabbed the receivables we are owed, then paid all of our tax liabilities, and paid our near-term payables (not long term loan balances)...then this is the money the business should have access to.” The goal of the all-in/all-out is not to get stuck on one week worth of data, but instead to watch the flow of that number over time and determine an appropriate “water level” of your business.   The P&L; will educate you on the past, the subdivided bank accounts and Level Two Dashboard will educate you on the present, and your future can be planned by building a simple budget ironically based on your past P&Ls.; A simple and well-built budget will take a forward-gazing future look towards the vision of the business.  What good is a budget if it is being spent on items that are steering the business away from the vision, or in haphazard directions?  A budget will have line items and categorized for things that will push you and the the business towards the vision.  If a line does not align with a healthy vision, then it is simply removed from the budget. A simple and well-built budget will take a backwards-gazing historic look towards the previous spending of the business.  Starting a budget from scratch without looking at prior spending is akin to a amnesia-riddled pilot learning how to fly a plane everytime she climbs into a cockpit.  That is not a plane you want to be on!  The quickest way to look at past spending to simply run a profit and loss report from prior years making sure that the expense categories are visible. Finally, a filter for a simple and well-built budget is making the appropriate time to actually sit down and build your budget.  Have you ever jumped out of your seat in the airport terminal and sprinted into the Zone 4 boarding line for your flight the second your boarding announcement came across the crackline terminal speakers?  All that sprinting just to stand their and wait in a line akin to a cattle stall.   That is NOT how we want you to budget.   Instead, block the time, maybe no more than 1-2 hours to sit, review your vision, review your previous profit and loss reports project what you think you might need in each category in order to hit your near term goals (see 12 Week Plan module) and your long term vision. The Executive Leader will make proximity towards the past P&Ls;, the present subdivided bank accounts and Level Two Tracking Dashboard, and plan the future with a simple annual budget.  A constant awareness of your triangulated (past, present, future) financial position will allow you to offer rapid motivation that emboldens your team to pursue the named future you see.