Cash in the Bank

How Can You Tell a Business Is Successful?

They make money. Please, please ignore the Facebooks and Twitters of the world. There are venture capital unicorns… and there are the rest of us. 99.9% of businesses have to make money to stay in business.

Here’s a harder question for you. How can you tell they are making money? Here’s a hint: It isn’t whether they are “profitable.” It’s whether they have cash in the bank and whether the amount of cash in the bank is growing.

There are a few caveats, of course. It is not necessarily a success to allow cash to accumulate in the bank but pay yourself (the business owner) below minimum wage. But outside of that, cash is king. Cash in the bank that was created by the operation of the business is success, even for a non-profit.

Cash Means Whatever You Are Doing Is Working

So how do you make cash? Money in > money out. How do you know if money in is > money out? You have a monthly cash flow that is positive. Where do you look for this magical indicator? On the cash flow statement (or statement of cash flows)! It’s actually a very overlooked report. Very few business owners, or even accountants for that matter, seem to use this report and I think it’s a huge mistake.

QuickBooks Desktop doesn’t even have this report as an option. What’s up with that? The most important indicator of success isn’t in the financial statements. That’s because most accounting systems are built for accountants to do accounting and not, for some unknown reason, built for the business owners and operators that need them to run their businesses.

How do you get your business from cash being negative to positive cash flow? You take a hard look at where the money is coming in from and where it is going out. Then you adjust your business model and how you run things until the dollars coming in are greater than the dollars going out.

The best way to try out the numbers and see what you need to do to right your ship is to create a budget, one that includes cash flow.

You know your business, so make some revenue (income) assumptions and cost assumptions. Start with some that you already know. Factor in what you are making and spending, then alter the numbers until the cash number on your projected balance sheet (that’s the place you look for your cash number) is going up over time and the operating cash flow and total cashflow on your statement of cash flows are consistently positive.

You got this.

If you want an easier way to understand your company’s financials, sign up for a free trial of AutoCFO. If you’d like some extra help and want to talk to a real person, check out our financial support services.