Every business owner has a big vision for their company and wants to make it happen. The problem is most business owners don’t know if the decisions they’re making are helping or hurting, leaving them confused and frustrated.
In a recent LinkedIn post, I asked what the one thing was that you wish you knew before you started your business. A business owner replied, “Starting business is easy, but scaling a business is hard.”
Today, we’re closing out this series with how Cash can help grow your business fast.
I’d like to tell you a story about a client I’ve work with for about 10 years, focusing on the last 4 years we’ve worked together. He did a lot of heavy lifting and here’s the highlights of what he’s done:
- Increased his cash from $36,000 to $2.06 million.
- Purchased $1.2 million in additional assets.
- Increased his run rate on revenue from $852,000 per month to $1.4 million per month.
- Increased gross margin by 10% and increased net margin by 15%.
It breaks my heart to see business owners who only look at their income statement and balance sheet and miss reviewing the cash flow statement. There are 3 things that cause cash to go up or down. I’ll use my client’s results to demonstrate. His cash went up over a 4-year period. 3 things drive changes in cash:
- Operating Activities- How much was sold and collected, and how much expense was incurred that was paid for by cash (not credit), will tell you how much cash was attributed to operating activities. For my client, about $3.04 million in cash came from operations. He’s generating cash by increasing revenue and margin at the same time.
- Investing Activities- Did you buy any equipment, real estate, or vehicles? All of these are included in investing activities. My client paid out about $1.1 million for equipment and other fixed assets. So, this amount is deducted from the cash generated by operations. My client purchased equipment to increase revenue and improve margins.
- Financing Activities- Did you borrow or pay back any loans? Also, did you declare any dividends and contribute additional capital? The net of what my client borrowed and paid back was $100,000. He’s borrowed very little to accomplish his results. He’s done it mostly with his own money.
There’s a simple equation to help understand your changes in cash:
Changes in debt (+$100,000) – fixed asset purchases ($1.1 million) + cash from operations ($3 million) = changes in cash
How this business achieved this would take another article. But the bottom line is, you can’t manage what you don’t measure. So, start using your cash flow statement to understand where your cash is going and what to do about it.