Thread by Kurtis Hanni

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Poor cash management is the number one reason businesses fail.

Simply, businesses don’t understand their cash flow.

Let me help you:
Cash flow is the money coming in and out of the business.

If more money is going out than coming in, you have to:

• Have cash reserves
• Get money from the owner
• Take out a loan
• Sell assets

So, it’s important to understand this concept.

Let us break it down:
Money coming in is:
• Revenue/Sales
• Loans taken out
• Deposits by the owner

Money going out is:
• Capital expenditure (inventory, vehicles, property, etc)
• Operating expenses (payroll, supplies, etc)
• Cost of Goods Sold
• Liabilities (taxes, loan payments, etc)
To manage your cash flow, you can break down incoming and outgoing into 3 categories:

• Income Streams

• Recurring expenses

• One-time expenses
• Income streams

Ask:

> What levers can I pull to create an immediate cash infusion?

> What can I do to create long-term cash flow?

If we don’t solve for both, we’ll always be stuck in the reactionary mode of immediate need.
> Immediate cash infusion

There are 2 sides of this equation: bringing in new customers and collecting the money.

Without customers, you have no money to collect.

But even with customers, you don’t have relief until you receive the payment.
> Long-term revenue

The best way to solve for this is monthly recurring revenue (MRR).

Other ways:

- Strong client relationships

- Ongoing services
Think through your income streams and establish a conservative estimate going forward.

Calculate the last 6-12 months revenue growth rate:

(Last month - first month) / First Month / # of months

Use and average revenue over 3-6 months to project forward your monthly revenue.
Once you understand the cash coming in, you need to understand what’s going out.

Look through the last 3-6 months of transactions and determine:

• What is recurring?

• What is a one-time expense?

• What is your replacement frequency of big expenditures?
• Recurring Expenses

These happen on a regular schedule (most frequently monthly or annually) and can be broken into 2 categories:

- Same amount

- Variable amounts

When variable, take the monthly average based on known values.
• One-time Expenses

There are very few one-time expenses. Sure, you may not buy that widget again, but most things are eventually replaced.

Understanding replacement cost is key to understanding your cash flow.
For one-time and replacement costs, think through a yearly cycle and come up with a monthly average.

Now, you can determine your monthly net cash burn:

Revenue - One time/replacement cost - recurring expense
Positive means you’re bringing in more than you’re spending.

Negative means you’re spending more than you’re generating in revenue.
If positive, it tells you how long it could take to pay for a big expenditure.

If negative, it tells you how many months you have left before running out of cash.

Current cash / Monthly net cash burn = Months Remaining
As you get comfortable with this, you can start doing a monthly cash flow forecast.

A cash flow forecast will help you:

• See the ebbs and flows of the business

• Make plans for a cash surplus

• Identify a cash shortage

• Run scenario planning
This is just a primer—follow me @KurtisHanni as I go deeper over the coming weeks.

If you’re a business owner or leader who struggles with financial statements and concepts, join me in my next cohort starting July 25:
maven.com/practical-finance/financials-decoded/
Every Thursday I write a newsletter and share 1 framework and 1 financial concept.

Subscribe here:
www.getrevue.co/profile/kurtishanni
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