What is the one thing that never lies to you? Cash.
That’s how many analysts and investors decide which companies to invest in—they track cash. How much cash does a business generate and use each month or quarter? Sure, they look at other things too—like management quality, brand position, market share, innovation, technology, corporate culture, litigation history, customer satisfaction, client and employee churn, supply chain management, channel marketing and so forth.
They also look at corporate financial statements, but, even under GAAP (generally accepted accounting principles), there is a lot of room for bookkeepers to fudge the numbers. Maybe they can find ways to bring some revenues from the next quarter into this one and push some payables from this one into the next one thereby inflating “profit” now.
But cash is cash and some of the largest, canniest investors put a great deal of emphasis on tracking one thing that never lies and that is cash.
It works in your personal situation too.
All you need to know are three numbers at the beginning and end of each month (or quarter)—your bank balance, your AP (accounts payable) and AR (accounts receivable).
So, let’s say Anna is a consultant; she is a sole proprietorship. She has two kids but no husband. She makes $130,000 a year so on the surface, she would appear to be doing great but she’s having trouble budgeting. What should she do? Track her cash position each and every month.
Here’s what her last six months looked like:[you can download my spreadsheet from, https://www.dropbox.com/s/bw8mrhdepv5b8vg/Anna-%20Budgeting-2018.xlsx?dl=0]
Anna’s “true” cash position as of January 1st is calculated by adding her accounts receivables to her bank balance on that day and subtracting her accounts payable (her credit card balances and her line of credit). So, on January 1, her true cash position is $28,520. The following month, her AP is slightly lower, and her AR is a bit higher so she ends up with true cash of $32,313 so she knows she is headed in the right direction.
However, the following month, Anna decided to buy a near new Audi (partly on credit and partly with cash). Also, her accounts receivable dropped because that month she had a sick kid at home for nearly a week and couldn’t put in the same number of working hours in her consulting practice; the following month, Anna revamped her home office so by April 1st, her true cash position has dropped dangerously low—to just $7,612, which worries her because she is not only head of the household, she is sole provider for herself and her children. Gulp.
However, she has an ace up her sleeve—she has a large bonus from one of her clients due in May, which, if she is able to collect it, will help her restore some of her cash balance.
Fortunately, she is able to so her true cash position has jumped back up to $44,958 as of June 1st.
Her goal is to always have a true cash position of not less than $50,000 on hand, which she hopes to be able to achieve by year-end.
If this was a company, and you multiplied these numbers by 1,000, you get a sense for the direction of cash and its speed—the organization’s ability to generate cash quickly (or not), and whether they are any good at holding onto it or not.
If you are a CEO (and all of us are in a fashion since we are the CEOs of our own lives), you can run even the largest, most complex enterprise (or family) by knowing just three numbers every month or quarter, and those numbers will never lie to you.