THE TECHNICAL CORNER: All Roads Lead to Cash

All roads lead to Rome CASH!

Like all industries, the accounting industry has its fair share of so called ‘gurus’ (or are they soothsayers, I am not sure).

However, one industry leader that has always resonated and held weight with me is Alan Miltz.

Alan has a long-held view that revenue is simply an opinion that can be manipulated and that it is only Cash and Debt which are fact that can be truly relied on.

It is these two key metrics that tell your real business story – the good and the ugly!

In recent blog posts, we have touched on elements of Cash flow in Top Strategies for Cash Flow Management in your Construction Business and How to stop bleeding cash you don’t have but let’s drill down a bit further on CASH – After all, it looks so good, right?

Well, it is good, but only if you understand what it represents and more importantly if its ‘free’.

We accountants (the lively bunch that we are!) think of cash flow in three tranches, Operating Cash Flow, Free Cash Flow, and Net Cash Flow.

1. Operating Cash Flow

As the name suggests, operating cash flow represents the cash generated from your business activities. It should not be confused between operating cash profit as the two can vary significantly.

Business owners need to understand how much positive cash the business operations are generating. If your business can not generate enough cash from normal business operations to sustain working capital and growth, then it may require financing from external sources to meet these requirements i.e., debt.

2. Free Cash Flow

Free cash flow is the cash remaining from operating cash flow after subtracting your expenditure on items such as fixed assets (i.e., plant and equipment) and other non-current assets.

The cash remaining after these expenditures is then ‘free’ to be applied to your financing activities which may take the form of principal and interest or other funding arrangements.

3. Net Cash Flow

The net cash remaining after meeting your financing activities or simply put, the net changes to your cash on hand (Bank) less the net changes to your debt (financing).

Your cash at bank may have improved (positive change) but if this is negated by increases in debt then it is hardly an improved position and in the long term probably not sustainable.

Hopefully this very brief overview of cash flow measurement provides some insight into why business owners should have a clear understanding of what cash represents. It is often our experience that once cash is taken out by the business owner it seems an extra ordinary harder exercise to have that money put back into the business, usually when it is critical to do so.

As accountants that specialise in the building and construction industry and its cash flow cycles, we would love to talk to you today about your cash flow concerns. Call us today or send us an email here. 

And finally, as Alan Miltz is often para-phrased ‘Revenue is vanity, profit is sanity, cash is king’.

Bryn Harwood