How far can your business go at your current rate of operation?
Knowing your gas mileage is not mandatory to drive your car, but it can certainly help. You don’t have to know how much gas is left in your tank either, but you may run out of gas and end up stranded somewhere.
The same is true for your business. We have talked a little bit already about your vehicle and some of the different tools for understanding your business and your progress. The last major tool that I want to explain is the Cash Flow Statement.
The Profit and Loss Statement, or Income Statement, is like the speedometer and tells you how fast you are heading toward your goals and the Cash Flow Statement is like your fuel gauge. If you run out of gas while driving, your speedometer will drop to zero and stay there until you can put more fuel into the tank.
Your business is the same when it comes to cash. If you run out of cash, your car will glide to a stop and your business will not progress toward your goal. You may have to get out and push your car which is usually represented by going into debt and not being able to make your payments.
The key to avoiding this problem is to know how much gas (cash) you have in your car at all times and it doesn’t hurt if you have an idea of your gas mileage also. When you are able to forecast the amount of cash flow that your company will have in upcoming days, weeks and months, then you can know how far your business can go toward your goals at your current rate and when you need to fill up your car again by implementing strategies to increase sales.
There are three different elements to a Cash Flow Statement, Operating Cash, Investing Cash and Financing Cash. These three categories show up on the statement, but the most important part to understand is the very bottom line which shows the change in cash over the specified period of time.
The other thing that I find useful is to graph your cash flow over a longer period of time. This shows how much cash you have on hand on average. When you operate in such a way that you average zero cash on hand over a period of time, then you are spending everything that you are bringing into the company. There are simple adjustments that can be made in your cash spending strategies that can help to keep your gas tank full all the time so you have no delays in moving toward your goal.
The most important strategy comes from the book The Richest Man in Babylon. The concept is to pay yourself very first when you receive payments. You need to know what your companies fixed and variable expenses are so you can figure out how much profit your company will make each month. When you know this, you know how much you will be paying yourself with each check received and you can put that money aside in a separate account to be used to either reinvest into growing your company or to invest in something else.
When you use this strategy, you can make sure that there is always gas in your car. This principle is very basic, but basic principles are the very most important because…
Without Foundation, your business fails!