Cash Flow Analysis Recap: the Key to Making Critical Decisions for Your Business
Which Company Would You Rather Buy?
That was NOT the introduction I expected in a presentation that was billed as “Cash Flow Analysis” for an audience comprised of small business owners intent on growing their companies.
Eric Rucinski of Advanta Consulting quickly piqued our interest and oriented our thinking, then flew through a wealth of charts, examples, abbreviations, and calculations that clearly demonstrated that “value” is the true measure of business success.
Any time you are faced with an investment, purchase decision, or virtually any choice, whether in business or in your personal life, you assess the values of your options. The short version of that assessment is “which would you rather buy?”
How do you assess value?
In business, cash flow is the ONLY thing that drives value creation — not sales, not gross profit, not EBITDA or EBIT, and not net income
It’s a simple concept with a not-so-simple calculation, which is EXACTLY why it is so often misrepresented or ignored.
The necessary work yields big benefits in the form of vastly-superior *actionable information* for virtually any investment/decision an owner of any size business might make. Cash flow analysis is universally applicable — entire companies, business units, launching new product lines, entering new markets, making investments, pursuing new initiatives, as well as buy/sell decisions.
Insert Glossary of Finance Terms and cheat sheets of formulas for key calculations here. Seriously. Because this is where a discussion of cash flow can start to get complicated.
Don’t get distracted with the complications and miss the Key: you have the power to evaluate value and risk, for virtually any business decision, with Cash Flow Analysis.
The difference between assessing value and cash flow analysis
“Accounting is not finance,” says Rucinski, “Finance is objective, fact-based *analysis* of quantitative information to develop *actionable insights*.”
Accounting is simply a standardized report on the past. By definition, it looks statically in the rearview mirror. Finance dynamically presents a much bigger, forward-looking picture.
Cash Flow Analysis is the tool that shines light onto the “why”, “so what”, and “what if” of the numbers to reveal the true value that exists or that can be created in a new initiative.
Three questions to ask yourself to start looking into the bigger cash flow picture
Rucinski offers 3 questions any business owner should ask before making critical decisions:
1. Do I have actionable financial information?
2. Do I understand what drives my cash flow?
3. Are my decisions focused on value creation?
For me, understanding what drives my cash flow was the epiphany. Well, it’s really more of a work-in-progress. Either way, the understanding I’ve gained has been huge in my decision-making process.
Understanding my cash flow forced me to realize what #1 and #3 REALLY mean.
I started by creating a 13-week cash flow projection based on templates that you can download from the Small Business Administration (SBA).
QuickBooks will generate a (historical) report titled Cash Flow Statement, but since Intuit also offers an Excel template for download, I figure I’m not the only one who benefits from seeing ALL the ingredients listed out.
At the end of the day (or quarter, or year), Cash Flow Analysis is the best tool for measuring value — and value creation is the true goal of every business. If this doesn’t make sense to you, I highly recommend that you dig into your business’ cash flow (and reach out to Eric Rucinski at Advanta Consulting) so you can make sure you are creating the value that is important to you
Eric Rucinski is Founder and Principal of Advanta Consulting LLC, an independent consulting firm that focuses on strategy, corporate development, growth initiatives, M&A, financial modeling/valuation, investment decisions, capital structure, and special projects. His 20+ years of experience includes high-impact full-time strategy, corporate development, and M&A roles at The Wendy’s Company, The Scotts Miracle-Gro Company, Limited Brands, Borden Capital, & Salomon Smith Barney.