Cash Flow: Two Truths and a Lie

This is a game called cash flow two truths and a lie. Grab a pen and keep score. Each round gives you three statements about money in your business. Two are true, one is a lie. Guess before you read the answer. Miss one, and that lie might be costing your business thousands, or even hundreds of thousands, over the life of your company. If you'd rather watch on YouTube, click HERE. 

Round 1: Sales and Cash

Statement one: customers are the only sustainable source of cash.

Statement two: a loyal customer is one of your company's most valuable assets.

Statement three: selling more guarantees I keep more cash.

Which one is the lie? The lie is statement three. Growth places a heavy demand on cash. More sales often mean more labor, inventory, vehicles, equipment, and overhead. Companies have doubled their sales and still ended up asking where all the money went.

Round 2: Profit vs Cash

Statement one: a profitable company can run out of cash.

Statement two: cash problems usually start long before the bank account gets low.

Statement three: profit and cash are the same thing.

Which one is the lie? The lie is statement three, and it may be the most dangerous one in business. Profit is the result of a math formula based on accounting principles. Cash is reality, either the money is in the bank or it is not. A business can be profitable and still have customers who have not paid, inventory sitting on shelves, loan payments, tax bills, and owner distributions still owed.

Round 3: Employees and Cash Flow

Statement one: employees make money decisions every day.

Statement two: small mistakes multiply over time and drain cash flow.

Statement three: cash flow is the accounting department's job.

Which one is the lie? The lie is statement three. Salespeople give discounts, supervisors approve overtime, and managers order inventory. Someone must deliver the service before an invoice can be sent, and someone must send the invoice before you can collect. Positive cash flow is created long before the paperwork makes its way to the office. The accounting team records what happened, but the rest of the company affects cash flow.

Round 4: Pricing

Statement one: charging too little creates cash flow problems.

Statement two: every discount comes out of the company's pocket.

Statement three: we can make up for low prices with more customers.

Are you catching on yet? The lie is statement three. Service companies are primarily selling time, and there is a limit to how much time you have available to sell, so relying on volume rarely works. Every discount also comes out of the company's pocket, since suppliers, employees, and landlords will not lower their own costs just because you gave customers a discount. Charging too little creates a cash flow problem before your team even starts the business cycle.

Round 5: Taxes

Statement one: income taxes are predictable.

Statement two: taxes are a cost of doing business and should be included in prices.

Statement three: the goal is to pay as little income taxes as possible.

Which one is the lie? The lie is statement three. Spending 100,000 dollars on equipment to zero out a 25,000 dollar tax bill leaves you with no money in the bank. That is a spending strategy disguised as tax planning. The best tax strategy is making great business decisions first, then structuring them to be as tax efficient as possible.

Round 6: Forecasting

Statement one: cash flow forecasting is a leadership tool, not an accounting exercise.

Statement two: hope is not a cash flow strategy.

Statement three: nobody can predict cash flow.

Which one is the lie? The lie is statement three. Cash flow is predictable, the same way an 80 percent chance of rain tells you to grab an umbrella before you get soaked. A simple cash forecast helps you spot problems while there is still time to act.

How Did You Score

Every one of these lies causes business owners to become reactive, waiting until cash is tight before asking questions. Cash flow is not controlled by one big decision. It is controlled by hundreds of small decisions made every day across your company. Stop thinking of cash flow as an accounting report, and start thinking of it as a leadership system. Once you understand how money moves through your business, you stop hoping you will have enough cash and start building a business that consistently generates it. If you found this blog helpful, there's tons more info where it came from! Sign up HERE to receive our newsletter for exclusive content and a resource roundup.