Ever look at your cash flow statement and want to crawl under your desk and hide? You're not alone! Cash flow statements aren’t really made for business owners, but that doesn’t mean you should ignore them. So, how do we read them?
In this episode, Danielle Hayden, reformed corporate CFO and CEO of Kickstart Accounting, Inc., is here to show you exactly how to understand your cash flow without needing an accounting degree through the Snapshot Cash Overview, Kickstart Accounting’s simple, business owner-friendly report that shows you exactly what’s coming in, what’s going out, and how much cash you really have to work with.
Key Takeaways:
- Traditional Cash Flow Statements Aren’t Made for You: They’re built for bankers and accountants, not entrepreneurs. That’s why Danielle and our team created the Snapshot Cash Overview, a simpler, visual tool built with business owners in mind.
- Profit Doesn't Mean Cash in the Bank: You can show a $20k profit on your income statement, but if you’re paying off debt or taking owner’s draws, your bank account can still feel empty.
- The Snapshot Cash Overview: Green means Money In. Red means money out. The Snapshot uses a color-coded system to help you quickly understand your revenue, expenses, debt payments, and draws.
- Know Your Free Cash Flow Before You Invest: Before making big decisions like hiring or upgrading tools, check if your business is generating enough cash.
- Use Net Cash Flow to Guide Your Owner’s Draws and Savings: Want to know how much you can pay yourself or set aside for taxes? Your year-to-date net cash flow will give you the clearest answer.
- The Snapshot Bridges the Gap Between Profit and Cash: It ties together your income statement and balance sheet so you can finally see where your money is really going.
Topics Discussed:
(00:11 – 01:57) Why Traditional Cash Flow Statements Don’t Work for Business Owners
(02:27 – 04:30) Introduction to the Snapshot Cash Overview and Its Key Components
(04:31 – 07:42) How Balance Sheet Items Affect Your Cash and Why They Matter
(07:43 – 10:06) Real Client Case Study: $109k in Income But Only $5k Added to Cash
(10:06 – 11:39) How to Use Your Snapshot to Make CEO-Level Decisions with Confidence
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Episode Transcript
00;00;00;00 - 00;00;20;21
Danielle Hayden
Welcome back to Business by the Books. I'm your host, Danielle Hayden, reformed corporate CFO now on a mission to help entrepreneurs step into their power by understanding their numbers. Today, we're going to talk about a report that so many of you tell me makes you just want to crawl under your desk and hide, and I'm talking about the cash flow statement.
00;00;20;23 - 00;00;45;20
Danielle Hayden
And as a CFO, I know that this is the most important statement for you to have access to to make better business decisions. So if you don't understand your cash flow statement, I just want to say you are not alone. You are not the only one. But more importantly, you guys, you do not have to stay confused. We created what we call the Snapshot Cash Overview.
00;00;45;22 - 00;01;08;08
Danielle Hayden
Today we're going to talk about what it is, why it's better than looking at the cash flow statement and how you can use it to make confident CEO level decisions in your business. So first of all, let's talk about what the cash flow statement is and why it's so confusing. To be honest, the traditional cash flow statement, it doesn't feel like it's made for business owners.
00;01;08;09 - 00;01;35;10
Danielle Hayden
It is made for accountants, investors and bankers. There are three sections in our cash flow statement; operating, investing and financing. But there's no real context. As a business owner, there's no story. It's just rows and rows of numbers and lots of technical labors. And so I'm not surprised that so many business owners avoid it and don't use it to actually make their business decisions.
00;01;35;12 - 00;02;00;10
Danielle Hayden
But here's the problem, when you ignore your cash flow statement, you're flying blind because you might be profitable on paper, but you are broke in the bank. I can't tell you how many times clients have said to me, you're telling me I'm profitable, but where did my cash go? $20,000 in profit does not equal $20,000 in cash. So here's what we did: here at Kickstart Accounting,
00;02;00;10 - 00;02;27;16
Danielle Hayden
we are on a mission to simplify the financial statements, to create reports for you so that you can use financials to make business decisions. And so we created the Snapshot Cash Overview. This gives you a visual straightforward picture of your cash, what's coming in and what's coming out. Now there's three areas on the Snapshot report: your operating cash flow, free cash flow, and net cash flow.
00;02;27;19 - 00;02;54;12
Danielle Hayden
The operating cash flow, this is the cash that your business generates from doing what you do. Selling your product, selling your services, and paying your bills. It's operating your business. Then we have the free cash flow. This is the cash that's left over after you've invested in the future growth. Think things like assets, software, equipment development, things for the future, and our net cash flow.
00;02;54;13 - 00;03;14;05
Danielle Hayden
This is the bottom line after financing all of our debt, our line of credit or credit cards. If you took out loans, pay down debt or distributed any profit, that is all included in our net cash flow. It is clean and it is actionable. So when you look at the cash flow analysis chart, you're going to see a few things.
00;03;14;07 - 00;03;36;24
Danielle Hayden
First is money in, this is our revenue. And I love the way that our chart is set up because you'll see this in green. How much money this month and year-to-date actually came in to the business in revenue. Then we'll have a line for our cost of goods sold. And this item, it's in red because it's money back out of the business.
00;03;36;24 - 00;03;58;01
Danielle Hayden
So we have all of our cost of goods sold. That's money that we spent in the business. Then we have all of our operating expenses. Then we also need to reduce our operating expenses from money in, right? Operating expenses is money out. So you'll see on the chart that this line item is red, because we are spending money to pay out to operate in our business.
00;03;58;02 - 00;04;22;18
Danielle Hayden
There's a few other areas in our operating cash flow. Our cash flow statement ties together our income statement and our balance sheet. All three of these reports, they work in conjunction together, and they have to balance. That's why we call it balancing in accounting. Now in our cash flow chart, you're going to see a few other things. Our changes in accounts receivable inventory and assets.
00;04;22;22 - 00;04;51;00
Danielle Hayden
Now this is going to be green or red depending on if it increased your cash or decreased your cash. There's areas in the business of spending that are not shown on the income statement. I know it's tricky, you guys, but there's things like accounts receivable, inventory assets, and liability changes. These things that are happening on the balance sheet and not the income statement, they still have a cash impact.
00;04;51;02 - 00;05;12;25
Danielle Hayden
And so when you look at your chart here in the Snapshot Overview, you can see if you, in green, if you received money in and you can see in red if you spent money in those areas. It's really important that we're looking at the green and red areas to see where we increased in cash and where we reduce in cash, and that's our operating cash flow.
00;05;12;29 - 00;05;41;15
Danielle Hayden
Our operating cash flow is revenue, cost of goods sold, expenses, and then our changes in the balance sheet like accounts payable, our liabilities, who we owe money to, accounts receivable, who owes us money, our inventory, and other changes in assets. Again, it'll be green if we received cash, if we received more cash than what came out, and it will be red if more cash went out than what came in.
00;05;41;18 - 00;06;08;21
Danielle Hayden
Those are operating cash flow section. And then we have our free cash flow. Like I said, our free cash flow, this is our investments into the future of our of the business. Fixed assets, intangible assets, think equipment, real estate, those things that are going to help us run our business in the future. And if you spent money on investing in those areas, you are going to see that show up in the chart as red.
00;06;08;21 - 00;06;31;25
Danielle Hayden
Then we have our net cash flow. Our net cash flow captures those last few items on the balance sheet that need to be captured because you spent cash and it didn't reflect on the income statement. So these will be things like dividends or equity. We see one of the most confusing things for our clients is that owner’s draws and debt payments,
00;06;31;27 - 00;06;56;00
Danielle Hayden
they are not on the income statement. So while you might have $20,000 in profit, if you took out $24,000 in the business and paying down your credit card, your line of credit and owner's draws, you have reduced the overall cash in the business by $4,000. And that is what we're feeling. That impact on our bank account, in our bank statements.
00;06;56;00 - 00;07;20;26
Danielle Hayden
It's going to tie together the profits to the cash in your bank account. We need to understand the changes in our cash on hand. Our cash, that's the amount of money that we have in our possession at the beginning of the month and the end of the month. And so it's important that we understand that change in our cash, because it's not always about profits.
00;07;20;28 - 00;07;43;03
Danielle Hayden
There are things that we invest in for the future. There are times that we're going to be paying down debt, and there's going to be time that you are taking out personal expenses and owner’s draws, tax payments, and you are allowed as a business owner, I want you to do those things, but I also want you to understand the impact that they're having on your bank account.
00;07;43;04 - 00;08;08;01
Danielle Hayden
So I want to give you an example of one of our clients who was working really hard to pay down their debt and manage their personal expenses. She had an income of $109,000, but she spent about $51,000 on cost of goods sold, so on the product and what she was going to sell to her clients. It cost her almost $34,000 to operate her business.
00;08;08;03 - 00;08;39;23
Danielle Hayden
Now, during this time period, it left her with an operating cash flow of a positive $25,000. This means that she had $25,000 to spend on future investments, debt, and owner’s draws. Now, over the course of the month, she had a net impact in cash of $5,000 because she spent almost $16,000 in paying down debt and another $5,000 in taking owner's draws and personal expenses.
00;08;39;25 - 00;09;12;20
Danielle Hayden
So although she had this amazing sales month, incredible, she's walking away with a change in her cash checking account balance of only $5,000. So it's important to understand that although we might have skyrocketing income, once we reduce the income by our operating expenses, cost of goods sold, our change in debt payments and owner's draws, we might have a reduction in the actual activity of our bank account.
00;09;12;23 - 00;09;38;01
Danielle Hayden
So for this client, out of the $109,000 that came into her business, she actually only increased her cash this month by $5,000. Now, there's no quick actions for my client to take this month. This client was generating cash, and she's using that cash to pay down debt and to create wealth for her family. This is in alignment with this client's goals.
00;09;38;03 - 00;10;01;15
Danielle Hayden
We had set a budget earlier this year, and so she is right on track aligning to that budget. And as we look to the future, we're going to continue to use that monthly cash flow number to decide what's next for her business. I know she has her eye on hiring a new team member. She also wants to save her taxes and her slow months coming up in quarter one.
00;10;01;17 - 00;10;22;24
Danielle Hayden
And so these are things that we're going to use the cash surplus to plan like a CEO. How can you use your Cash Snapshot to lead your business? Here's what I want you to do, I want you to check your free cash flow before making any large investments or hiring decisions. You can look at that number for last month and year-to-date.
00;10;22;26 - 00;10;49;23
Danielle Hayden
Do you have a surplus in cash from operating the business to actually invest in future decisions? Then let's look at our net cash flow. This is the number that we need to use to guide our owner’s draws, bonuses, debt payments, and savings. I want you to look at your year-to-date net cash flow, to decide how much cash you need to leave in the business, and how much you're comfortable with taking out of the business as draws.
00;10;49;25 - 00;11;16;01
Danielle Hayden
As a business owner, it's important that you're watching these trends month over month and deciding what this means to you in this season of your business. Is your cash flow improving over time? Is it holding steady or is it heading for a cash crunch? We are hearing from our clients that this year has presented new challenges, and so managing our cash is going to help us stay ready for the future.
00;11;16;03 - 00;11;41;15
Danielle Hayden
It's time to ask questions. If you don't understand what these numbers mean, that's why your bookkeeping team is part of your strategic partner. That's why we're part of your money team. We're not just another vendor. So pause. Review your Snapshot Cash Overview and ask the questions. We're here to walk you through those numbers so that you can lead your business like a CEO.
00;11;41;18 - 00;12;25;13
Danielle Hayden
I hope you enjoyed today's episode of Business by the Books. Don't forget to hit like and subscribe! This is the number one way we can help other entrepreneurs find this podcast because here at Kickstart Accounting, Inc., it is our mission to help entrepreneurs understand their numbers, get access to this information, and grow and thrive in their business. So please help me help other entrepreneurs understand their numbers so they can finally grow and thrive.