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Cash Flow Management Principles

Episode Summary

Cash is the engine that makes any company run. Your business will not survive without it. That’s why it’s absolutely critical you have a consistent focus on cash management if you expect to have a successful business.

You need an approach that can give you a very clear view of the true operating cash requirements by indicating when the high and, more importantly, the low cash balances will be realized well in advance of the actual events. It’s this advanced knowledge that can be the difference when cash difficulties arise.

In order to develop a reliable process you must establish a method for estimating the timing your cash receipts and the approximate distribution of cash resources to all areas of the business. This information should be presented in a specific format to allow you to see the large blocks of cash disbursements that occur regularly in the company’s operation and better match them to the timing of the receipts that are expected. This information should be updated on a regular cycle to refresh your view of the future.

This podcast will give you some ideas about cash flow management and how to put it to good use.

Cash Management

Welcome to the RQB podcast where today we are joined by Fred Parish of the Profit Experts. He’s the CEO. They provide affordable CFO services to small and mid sized businesses with proprietary software. They allow small sized businesses the capability that large businesses have for a much more affordable price. Fred, thank you for being on the show. I’m also joined by Mark, the CEO of RQB, the people who sponsor this podcast actually. How are you two today?


Great. Good to be here.

Excellent. Fred, we, judging by the name of your company, The Profit experts, you seem to be the expert on cash flow, which is what the focus of this podcast today will be. Give us a brief description for those who don’t know, like myself, what cash flow really is and the importance of it.

Cash Flow Management Principles
Cash Management: Without cash, you can’t pay your people, you can’t buy supplies, you just can’t operate.

Cash flow is, I’m sure most people have heard, cash is king. Without cash, you can’t pay your people, you can’t buy supplies, you just can’t operate. Cash is absolutely critical to every business, big, small, makes no difference. The one thing that I think is really important is the fact that cash flow is not the same number as profit. The ability to understand the difference between those two is just absolutely key to a successful long term sustainable business.

What would you say is the biggest differentiating factor of profit and cash flow?

For example, there are companies that actually generate a loss in a particular period of time but still are cash flow positive and vice versa. There can be companies that are profitable that have large expenditures for inventory or fixed assets, capital expenditures, that are cash flow negative. It’s very important to know the distinction, understand why one number is what it is but then again, understanding exactly what that cash flow is. Not only the amount, but the timing is key as well.

I’d like to add to that. It’s one of the easiest things to get but it’s the hardest thing to get owners to actually understand its importance. In order to get accurate projections on where you’re going with your company, I have, also to customers that always ask, I can’t tell where I’m at, where I’m going. With a little bit of diligence, it’s the first thing that comes out of being diligent with your accounting and your books, is that you can drive you’re going to be 30 days out, 60 days out. You can project, “We shouldn’t buy that piece of equipment this month. It’s going to be a tough … We have three payrolls, five weeks in a month coming up, three payrolls. We got to hold off until we get passed that.” That’s the type of thing that you can get from cash flow forecasting. It’s such a tool and hardly anybody uses it.

Now, Mark, you just used an interesting term. Cash flow, what was it? Predicting?


Forecasting. What exactly does that mean?

Forecasting is just like the weather. It gives you ample time to make changes in your plans given a storm is coming or that it’s going to be a beautiful beach week. “Let’s go on vacation and enjoy the time.” Cash flow also allows you to predict that, “We’re starting to get ahead. Why don’t we plan on doing an initiative to pay down some debt faster than we had anticipated because cash flow is getting high.” Likewise, like anybody, if you don’t have money in your wallet, you can’t spend it. If cash flow is forecasting four weeks out from now we’re going to be scraping the bottom of the barrel, we should make some cuts now so that we don’t feel the pain quite as much.

Cash Flow Management Principles
Cash Management: Not only the amounts but the timing of when that cash is going to either come in or go out is absolutely key.

Great point. Absolutely. Also, how you go about accomplishing that is important. Certainly, the P&L and the balance sheet are the key to how you get to those answers. Unfortunately, most of the time, business owners will pay attention to P&L. They’ll look at the top line revenue, look at the bottom line profit. Other than possibly send a copy to the bank, they don’t spend a whole lot of time looking in between and definitely don’t spend a lot of time looking at the balance sheet, which they could be profitable on the P&L but they’re bleeding to death on the balance sheet. You have to take into account the entire financial picture. Again, not only the amounts but the timing of when that cash is going to either come in or go out is absolutely key to the answer of whether we are going to be cash flow positive or negative.

For those who don’t know, let’s say the host of this particular podcast, what does P&L mean?

P&L is profit and loss.

Got you.

Let me just add another point too. A lot of people, every month in the franchising world, the franchisers require their franchisees to submit a profit and loss and something that make sense. We get called all the time and they’ll say, “Mark, can we go over this profit and loss? It’s showing I made $15,000 in profit but where is it? It’s not in my bank.” There’s always a disconnect between what people realize is going on within the chart of accounts, the fact that there’s half of it dedicated to the profit and loss and the other half to balance sheets, which is, for lack of a better term, like taking money out of one pocket and putting it into the pocket. A lot of times, I have to sit and explain to clients, “Okay, let’s take a look at your balance sheet so that you understand where that $15,000 profit went because it’s not in your bank. It’s definitely somewhere in that balance sheet.” A lot of times, people get lost in that set of financials, profit and loss, balance sheet. What really they want to know is cash flow. What did I spend this month and what do I need to do in order to survive next month because there’s three payrolls and five weeks in this month coming?

cash flow management principles
Cash Management: Most of the time, the cost structure doesn’t fluctuate as much as the revenue might.

Exactly. Just to add to that, when you’re looking at the business that is highly seasonal or has a particular business cycle that repeats at different points in time, being able to take those fluctuations into account when you are doing this longer range forecast is absolutely important to understand, again, the timing of when that cash is going to hit. If revenue is down in a certain point in time than the cash flow behind that, and depending on what business you’re in and how quickly you’re able to collect that revenue is certainly going to be impacted. Most of the time, the cost structure doesn’t fluctuate as much as the revenue might. It’s important to be able to look out far enough so that you can see that you’re not burning cash when you’re slow, that you’re not replacing when you’re busy. That cycle is very important and how you manage that in those forecast is going to be a key element of how accurately you’re going to be able to predict those balances.

Speaking of forecasting, is there a sweet spot of how long you want to look ahead for cash flow, a certain amount of weeks, months, something like that?

In our experience, it certainly depends on the condition of the company. Mark, I’m sure you can address this also. Some companies that are really having cash flow problems, they look at cash every day and they’re forecasting days and weeks ahead. There are some companies that are not in such a poor cash position that doesn’t really have to look at those very, very short timeframes. They can look at it monthly, quarterly. Sometimes we’ll forecast out years in advance so that we understand what the long term trajectory looks like and whether that’s a favorable or unfavorable flow. If it’s an upwards flow, great, we’re going to make some decisions about what we’re going to do with those cash reserves that we’re accumulating over time. If it’s a very negative trend, then we have to make some decisions today to correct those future outcomes in order to change that from a very negative to a positive result.

I was just going to add that it really depends on what milestones the business owner has. For a landscaper, he’s looking for the events leading up to the first snow fall. For a restaurant that’s in a seasonal town, they’re looking at everything leading up to Labor Day. What are we going to do now to survive beyond Labor Day? It really just depends. Bonuses at Christmas time, that’s a milestone that you have to get passed. What do we need to do in order to survive that? Corporate taxes, social security, that all is based on a certain threshold. Once it’s met, the end of the year, your employees end up getting more money out of their paycheck. Likewise, the company’s not paying as much in payroll tax. Unemployment. The last part of the year you don’t have to pay that because it’s only predicated on the first $14,000 or $9,000 or whatever that particular state is. Once it generates, all of a sudden you’ve got a new tax that you didn’t expect. You’ve got to really look at milestones and predict your business as what kind of milestones before you can even do a forecast.

Great point.

Fred, if you had one key point about cash flow for let’s say a new business or going to be a business owner that is not quite familiar with the concept. What’s a pivotal point that they need to be aware of when forecasting and looking at cash flow for the business?

From the very beginning, they have to pay attention. Even if they have a large balance in their bank account when they first start, it’s surprising how quickly that will be diminished. Even if initially they do it on the back of a napkin, do something, pay attention. Keep track of what is happening in the business. What’s your revenue? When do we expect to collect that revenue? What are the expenses? When do we expect to have to make those payments? Where are those trends heading? Are they heading up? Are we starting to generate cash or are we burning cash? How long do we have before we burn through our resources? Unfortunately, in my experience, a lot of the times, people don’t look at those things until they’re in trouble. By the time they do that, it is extremely difficult to recover and in some cases, it’s unrecoverable. From the very beginning. It can start out simple, it can get more complex over time. My one piece of advice is the old Nike slogan, just do it. Do something, be planning from the very beginning.

Google Cash Flow Kings and Profit Keeper and Remote Quality Bookkeeping and people that can advise you. Ask, ask questions. People who ask questions usually make their way to somebody who can give them advice. You have to fish through the advice and make sure it’s sound. 90% of the time, if a person enters into business with a inquisitive mind, they’ll find their way.


Beautifully said. Fred, thank you very much for being on the podcast. This is hopefully informative for everyone out there listening and being curious about cash flow, P&L, which I now know what that means so that’s good. It was pleasure talking. Maybe we’ll do this again sometime.

Thank you very much.

Great, Adam. I appreciate it.

Thanks, Fred.

It was great. Take care.

About Fred Parrish

cash flow management principles

Fred Parrish is the Chief Executive Officer and Founder of The Profit Experts™.  During a 36 year career he has held positions from staff accountant to CEO in both public and private companies with revenues ranging from $2 million to $3.5 billion.  Fred has served on the Board of Directors for 12 organizations in aerospace, manufacturing, healthcare services, business services, insurance, international missions, document management and software development.  He has extensive experience in directing and overseeing company operations, managing corporate resource development and directing strategic planning for domestic and international organizations.  With this broad experience in both operations and financial management in a wide range of industries and at all levels of the organization, he has developed a proven process for optimizing operational analysis, dynamic cash flow management, staff efficiency planning, profit mining and organizational development.  He is the author of The Profit Mentality, a guide for maximizing entrepreneurial success.  Fred is a speaker and instructor on subjects related to profit and cash flow optimization.

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