A cash flow statement is a power in your hands. It is like a mark sheet of your cash flow performance.
We looked at the role of a cash flow statement in building your cash flow foundation.
We are going further by using cash flow statements to have cash flow clarity and control in your business.
There are three keys action to take:
- Managing Your Cash Flow (which you can remember with the letter M)
- Analyzing Your Cash Flow (that you can remember with the letter A)
- Projecting Your Cash Flow (You can remember with the letter P)
Because of these letters, I call it the MAP Method of Controlling the cash flow.
Let’s see how to implement the MAP method in your business.
Implementing the M.A.P Method with a Cash Flow Statement
M = MANAGE
I learned to drive a car in a very quiet place with no one around. There was no traffic. It was just me.
At first, I had to learn to control the car using gears, the steering, clutch and accelerator, brakes and everything. When I was comfortable controlling the car, I became comfortable moving ahead.
You do the same in your business by learning to manage cash flow.
CASH FLOW MANAGEMENT = CASH FLOW CONTROL
CASH FLOW CONTROL = CONTROL IN YOUR BUSINESS.
A = ANALYSE
Once you know how to control the car, you want to get on the road and drive slowly. At that point, your ability to scan the road analyze the situation is important. Otherwise, you may run into an accident.
Similarly in business, you’ve got to analyze cash flow and understand what has happened in the last three months, last six months, and last year. When you analyze and understand the past happenings in your business, you can avoid pitfalls and cash problems.
You will notice patterns and trends. This will help you anticipate what is going to happen with your cash flow in the coming month. You can use your understanding to project cash flow. We’ll talk more about it in the next step.
Once you analyze cash flow, you get in a good position to project your cash flow. You know what has happened in the last three or six months. With this information, you are in a good position to predict your cash flow for the next three or six months today.
Now you know how the MAP method works and just need to implement it.
You don’t have to understand it on your own
I’ll be with you for some more time and help you understand it with the help of an example.
Meet Heather, the founder of Mega Profit Limited.
An example from her business will help you see the M.A.P. method in action, and give you clarity on how you can implement it in your business.
You’ll see how by implementing the M.A.P. method, Heather moved from an $80k cash balance on 1 Jan 2021 to $180k at the end of March (31st) 2021.
Let’s start in the beginning.
Jan 1st, 2021 – the first day of the year and also the first day of a new financial year.
And, Heather is excited to start with a bang.
Her financial coach brought forward the balance of $80k cash to start with.
Heather’s trading experience reveals January is one of the biggest months of the financial year. She knows that based on last year’s figures, she needs to have at least $150k in the bank every month otherwise she will start to feel concerned and worried about her cash position.
She wants to cover at least 3-4 months of fixed expenses if the business does not perform as expected. So she is cautious about how she spends cash in the business. She’s been keeping an eye on cash flow, especially weekly cash outflow, to make sure she reaches her monthly cash left balance goal of at least $150k.
Cut to month 2 of the year.
It’s 2nd Feb 2021, and Heather has just reviewed the cash flow statement that her financial coach sent over. It shows cash received in Jan was $158,750, and cash paid out was $85,000. The accumulated balance of $153,750 (on Jan 31, 2021) net $73,750 is from January and $80,000 carried over from December.
Fixed expenses and cost of fulfillment were $50,000 and $35,000, respectively.
Heather MANAGED her cash flow well. This ensures that her cash balance is just above $150,000. So, she achieved the target of keeping a cash balance of at least $150,000 at all times.
She has been able to control her ‘business’ vehicle, i.e., manage cash flow for January. By doing this Heather implemented the M of M.A.P. Method.
Cash flow under control, Heather now wants to dig deeper.
For this, she needs to ANALYZE her January cash flow statement.She can see in the statement that her business collected most payments, $65,000 out of $158,750 total, for the mastermind. Thanks to this insight, she is now committed to selling more mastermind programs in the future.
In terms of cash outflow, she paid $50,000 for fixed expenses and $35,000 for the cost of fulfillment. However, she noticed that the fixed costs have increased by $10,000 since December 2019.
She is concerned that her monthly fixed costs have increased and will hurt cash flow. She is also glad that she did this exercise; otherwise, she wouldn’t have figured out two important things:
(SPOTTING HAZARDS and OPPORTUNITIES)
- She needs to spend her time and energy on selling masterminds
- She needs to analyze why fixed expenses jumped by $10k in January and what she can do about it.
Now that Heather has analyzed her cash flow she moves to the next important step in the MAP method which is PROJECTION.
To project cash flow in February of 2021, she reflects on current market conditions as well as looks at cash flow in previous months.
She looks at the Debtors’ reports. This report shows that customers owe her $100,000 today, out of which $85,000 is due by February.
She also looks at the Creditors’ report, and it shows she owes them $80,000 as of today. So she selects the suppliers and the respective balances to pay for $75,000.
So she updates the cash flow projection statement like this:
1st Feb 2021 opening bank balance- $153,750 (It’s the same as closing balance 31st Jan 2021)
- Cash to collect from customers in Feb – $85,000
- Cash to pay in Feb – $75,000
- Cash left projected balance- $163,750
Let’s meet Heather again in March.
It’s 1st March 2021, today. And her financial coach has sent her the cash flow statement for February.
In Feb, there were cash receivables of $80,000, out of a possible $85,000. And the business paid out $75,000 as projected, so the cash balance was at $158,750 instead of $163,750.
She goes through the M.A.P. methodology again to understand how well she has managed cash flow in Feb. Next, she does further cash flow analysis of the differences compared to Jan 2021. Then she projects cash flow for March.
It’s 1 Apr 2021.
In March, Heather’s business generated a cash inflow of $101,250 The business paid out $80,000, So that leaves your cash balance at $180,000 at the end of March.
You can see how her cash flow balance moved from $80,000 in cash flow balance on Dec 31, 2020, to $180,00 on March 31st, 2021.
Now Heather has three months of cash flow statements month by month. So not only can she review what’s going on every month, but she can also use the cash flow movement that has happened in the past quarter, Jan to March, as a base for subsequent quarters.
To do this, Heather analyzes the cash flow statement for Q1 2021.
Among the many patterns of cash inflow and cash outflow, one thing is very noticeable. She notices that Mastermind is selling more because she switched from Google ads to Facebook ads in the middle of January 2021 and it worked really well for her.
She feels the power of using a cash flow statement has given her clarity, control, certainty, confidence, and the ability to communicate her business numbers.
Let’s see how.
How Heather found cash flow clarity, control, certainty, confidence, and the ability to communicate her cash flow data
Heather Found Cash flow Clarity
Because now she knows about the products she needs to focus on. She clearly understands her fixed expenses per month, and she knows whether she has enough to cover for the next 3-4 months if sales slow down. This understanding will save her business from a collapse like 82% of small businesses that go down because of cash flow problems.
Heather Feels in Cash flow Control
Because she now stays on top of cash payments every week. She has cash outflow under control. She also knows, every month at the beginning of the month, how much cash to collect by the end of each month. She can delegate the job to ensure it happens. All these insights and resulting actions have ensured that the closing bank balance every month stays above $150,000.
Heather Is Certain
She has been going through a cash flow statement every month to manage, analyze and project cash flow. Thanks to this, Heather’s ability to project cash flow and predict future cash balance today has improved significantly. This has provided her with certainty in her business. She can now rely on future cash inflow to cover future cash outflow. And, she can sleep soundly at night without worrying about what might happen in the future.
Heather Can Communicate Numbers
Thanks to being up and close with numbers and understanding them like never before, Heather can now talk the language of business in terms of cash flow and profit. With this newfound ability, she can reach out to investors and raise funds to grow her business if she wants to.
When talking to investors, she can communicate her value proposition better to investors.
When talking to a bank, she knows how much she needs to borrow, if she needs to borrow, and when and also for how long.
Heather is in this position because she chose to work with a profit and cash flow coach as soon as she realized she didn’t know numbers in her business well.
Her ability to talk numbers well has made life easy for both her cash flow coach and her. They can have meaningful conversations when discussing the finances of Heather’s business because now they both know exactly what they are talking about. Heather no longer has to pretend she understands something when she doesn’t.
Heather Is Confident
Heather’s confidence is soaring high by learning to manage, analyze, and project her cash flow.
She is now a confident cash flow entrepreneur who knows what’s going on with her cash flow at all times.
She can now take crucial decisions that are not based on her hunch alone but are grounded in numbers. She just decided to hire a helping hand to free up her time. She knows she is still within the projected cash flow balance, and she still is covered for the next 3-4months. She is calm. There’s peace of mind as there is no longer a fear of the unknown and failure.
Heather is happy to have found the M.A.P. Method on time She is happy to be part of 18 % of businesses that thrive because they know their cash flow in and out and not be among 82% of businesses that fail because of either poor understanding or poor management of cash flow.
You can be the next cash flow champion like Heather.
You can have the same clarity and certainty as her.
You can be confident in knowing your numbers and feel in control of your business.
You can raise funding if you want to unlock the hidden value in your business.
And more than anything, you can survive when times are tough and thrive when times are good.
Won’t you like that?
If you prefer to watch the video about how Heather became a confident cash flow entrepreneur, then here’s the link.