What Is Cash Flow & Why You Need To Understand It

Key take-aways of the video:

1:14 - Poor cash flow causes how many business failures?

1:50 - The difference between cash flow and profit?

3:25 - What do successful businesses do?

4:00 - What are some factors that you should consider before going into selling at all costs?

8:20 - Easy ways to increase your cash flow...

10:26 - The soda machine example for cash flow and 80/20...


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  1. Expenses

  2. Income

  3. Cash Runway

You’ll be able to:

  • Understand where you can cut expenses on things that don’t help your business immediately.

  • Brainstorm new ideas on how to create income now.

  • Build relationships with the customers that matter.

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What does cash flow mean to you as a business?

Cash flow is nothing more than the total amount of money being transferred in and out of a business but in the context of the way we look at it we've always especially being in a real estate we've always looked as positive cash flow and that's taking in more cash than you're spending.

In other words if you take in 400 today and you spend 500 today you have a cash flow of nine hundred dollars but you have a negative cash over a hundred dollars.

You're looking for positive cash flow is the way that we measure things. That’s the only thing we're interested in when we're helping our clients - is creating that positive cash flow consistently. Positive cash flow will keep your doors open long after profitability will.

Amazon is a heck of an example - they go 20 some years without making a profit but they were a cash cow.

Positive cash flow gives you that that financial cushion - that confidence to implement changes and make your business worth owning.

We know that the majority of small businesses fail within five years and I think it was U.S. bank conducted a study and discovered a number of reasons for this but the primary reason was that 82 percent of the time poor cash flow management or poor understanding of cash flow contributed to the failure of a business.

That old saying cash is king and why you want to focus on cash flow. You have to have positive cash flow all the time.

I think a lot of people get confused between cash flow and profit - so what's the difference?

Profit is the revenue remaining after deducting all the costs associated with operating the business. While cash flow is amount of money flowing in and out of a business at any given time. Whereas, we just talked about positive cash flow is taking in more cash than you're then you're putting out the door.

So you have a really good saying and I really like how you put this - you can be very profitable but still go out of business so can you just explain what does that mean to you when you say that?

Well, again some of the some of the people we've talked to right they're making money but at the end of the year they've got nothing left in the checkbook and they've had to go and borrow money to pay last quarter’s taxes or the last quarter payroll. Whatever it is and they can't quite figure it out. Well, it's because most people are geared for revenue, revenue, revenue.

I mean it's even like when I was in the car business. I really didn't care about revenue. I cared about gross profit.

But you know cash flow comes out of that gross profit more or less so successful businesses do two things.

One they make money, they make a profit and they generate cash.

Those are the two things you've got to be working towards is making a profit and generating positive cash flow.

You're right you can you can make a profit and still go out of business because you have negative cash flow and that's kind of the reason that that most businesses fail within the five years is they may be profitable but they're spending more than they’re taking in. Most people think when they need to make more money think of I need to just get more I need to sell, sell, sell I just need to get more revenue.

How do we view I mean how do you view that when somebody comes to us and says that what should they be doing differently before they ever get to that hey I let's just get more let's just get more customers in the door?

Well again being 80/20 guys we know very well only 20 of your inventory, only 20 of your customers are generating profit and and probably by consequence generating your cash flow.

80% of what you do, 80% of what you sell, 80% of what you inventory and it's not an exact science but the point is the vast majority of what you sell - the vast majority of your inventory, the vast majority of your customers are a waste of your time and effort.

But you know be before and before we even start to say well let's let's focus on marketing and let’s start helping you sell more let's look at some certain things. I mean some of the basic factors to look at is track and categorize your expenses you need to know exactly what you’re spending and where you're spending it on.

Have a benchmark, most businesses either have an association or you can go you can pretty easily find out - what other businesses within your market or industry for a cash flow balance so to speak.

And then most businesses way overspend.


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We've walked into a lot of places and I think what's happened during this COVID is a really good example. We've talked to a number of people who now said you know I’ve come to realize I can make almost as much money without any of the headache, without nearly as many employees, without all the products and inventory that I used to have.

I don't need the big piece of real estate. They’re beginning to realize you don’t need to just sell, sell, sell, you need focus on the 20 percent that generates 80 percent.

It's more about focusing - figuring out I would say the difference is maybe people are starting to wake up to that they can figure out who their top people, top services, top products are. The things should be really be doing - what’s that top five percent of things they should be doing whether that's who the customers they should have or their products or services and focusing on that - it's just a shotgun approach. It's rifle shot versus shotgun

When we first started this I still remember one of the first people I went in and talked to him and you know about 8020. We gave him our book you know Marketing Strategies Simplified.

He was paging through and he said, “Yeah I really agree with this.” and I started talking about what 80/20 principle was he was asking me about that and I said well I can tell you right now that the vast majority of your customers are wasting your time.

“Hh no no no no!” he says, “everybody's my market.”

We didn't go too much farther than that conversation because there's that old saying a man convinced against his will is of the same opinion still.

When you stop and think about we know it very well. You can make a lot more money with a lot less effort - a lot. I don’t want to say fewer customers but I know the better customers.

Everybody has ideal top clients and that is one of the things we always focus on is figuring out who are your top clients.

And the other thing is - what are your 20 percent of your products that you sell that are actually making money and you excuse the french but can the rest you just don't need it.

What are some ways someone can increase their cash flow - just some easy things?

Well there are numerous ways - we’ve got when we sit down with somebody we've got nine things we can help them with or at least make them aware of.

We focus on two things expenses and inventory. Helping them to categorize their expenses when you when you know who your ideal top customers are and you're right it really is almost in all cases it’s the top five percent.

Then you start generating your marketing messages - your expenses, your employees, everything starts being geared towards who are who is that ideal top five percent.

You profile them and you start looking to duplicate those but also you start looking at your expenses and say you know what are the expenses that are not generating revenue that are not serving this ideal top customer.

Seriously consider getting rid of those expenses when it's put down on a spreadsheet like we do. It becomes very obvious to everybody they look and say why have I got this person or why am I spending money here that is catering to this 80 percent or 95 that i'm not making any money on it makes no sense.

You know let's go out figure out who these five percent are and let's start duplicating them and make that pie bigger and get rid of these expenses that aren't generating revenue.

Then the second thing is inventory you know stock and sell only what your top clients use - the twenty percent.

Sell only what your top twenty percent are buying. Inventory only what your clients buy and what turns quickly.

A way that I used to teach my sales managers in my car dealership. This is kind of an abbreviated way to explain it but let's say you own a bunch of soda vending machines with 10 rows of different flavors in each row.

Go in and you fill them up every week. At the end of week one rows one and two are completely sold out. Rows four, five, six, seven and eight are partially filled full. You’ve sold a few rows and nine and ten still full - they had no sales.

You replace rows nine and ten with one of the flavors from rows one and two. Go back the next week. You discover rows one, two, nine and ten are now completely sold out. You continue with this tracking in sequence until all the rows are filled with those one, two or maybe three flavors that sell and you know every week they sell out.

All of a sudden you've got 10 rows filled with two or three flavors and you're filling them every week.

That's the same way I wanted them to look at my car inventory. If it isn't selling in the car business I wanted it gone in 30 days.

If it isn't selling in 30 days - look at particular price ranges, colors, make, model type, category of car. That was a little bit more complicated but this is a simplified way of getting them to understand that any business owner to understand stock and sell only what sells quickly - not something that you've got in stock for three years.

We had this one restaurant that we did this for, they had a wine inventory of I know - it was sixteen thousand dollars. I don't know how many bottles you know and so when we inventoried and we started tracking it they had wine bottles there for three years. Well very easily they began to see what kind of wine, what price of wine starts to sell.

We were able to get that 16,000 down to initially down to 7,000 but I think they brought it back up to 9000 or 10,000.

But in essence that generated six to eight thousand dollars of extra cash a month that they didn't have to spend on inventory and it turned very fast.

And that's cash flow - that's how you get cash flow.

Cash is king. That’s the one thing everybody has to understand about cash. It is king. Everything you do has to be towards generating that positive cash flow and our method based on the 80/20 principle is I don't want to say full proof but it says dang close to fool proof as you can get.

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