Cash flow as a measure of leadership
Your cash flow position is a reflection of how well you are doing your job as a leader. It is a measure of the success (or lack thereof) of the execution of your strategic intentions. Hence it is critical that you often put on your financial hat in addition to whatever other hats you wear. Think of cash flow as the pulse of your business. Just as a doctor uses your pulse rate for diagnosis, so should you be evaluating your cash flow frequently to feel the pulse of your business.
You could go bankrupt if you do not pay attention to this measure. Whether managing your personal or business finances, ignore this measure at your own peril. Whether you are starting out in business or you have been in business for any number of years, you should not underestimate the impact of cash flows. This is probably a good time to define cash flow.
Cash flow is a measure that determines your ability to meet your operational and financial obligations. The measure is a difference between all your cash inflows (from all sources of financing) and all your cash outflows (from all uses of financing). Needless to say, having a positive cash flow is desirable. A positive cash flow means you are getting more cash into the company than it is going out.
While it is good to have a positive cash flow, just paying attention to the aggregate cash flow number is not enough. Your business can have the following buckets of financing:
- Cash flow from financing activities
- Cash flow from investing activities
- Cash flow from operations
Cash flow from financing activities
Cash flow from financing means your business either got money using equity (private equity, venture capital, equity sold to family and friends; i.e. shares sold to any individual or another business) or debt (loans from friends and family, loans from bank or any other financial institution).
While it is desirable to leverage your business, leverage should be managed. If your business requires you to carry inventory, then it’s best to leverage. You need cash for working capital and other short-term obligations. You should treat this as insurance. This line on your cash flow statement must only undergo an increase if you are confident on paying back the debt you acquire.
If the primary source of cash for your business is this bucket, then you are burning cash. If you are not able to generate cash from operations to sustain the business and depend on external financing then you are going to be in deep trouble sometime.
Cash flow from investing activities
Yes, you can generate cash from investing activities. But again, this should not be your primary focus. If you have spare cash available, then you might want to put that in money market funds (typically for less than one year depending on when you need the funds). An entrepreneur rarely has spare funds when starting out. But once you have built your business, you will need to park some of your excess funds if you do not use it in operations.
Cash flow from operations
All your energies must be focus on making this bucket the primary contributor to your cash flow statement. Cash flow from operations means you are generating cash from your operations; i.e. generating revenue. Needless to say, if your cash inflow from operators is greater than your cash outflow from operations your liquidity position is good.
If one of your financing sources is debt, then you need to generate enough cash from operations to not only pay for your business expenses (cash outflow from operations) but also to pay for the cost of financing (interest charges).
Cash flow and leadership
Cash flow measures:
1. How successful as a leader you are in securing financing for the organization
2. How you balance your day-to-day finances of your business, and
3. How your team chooses to maximize return on investment with their activities
So, within the boundaries of ethics, the leader should execute strategies to maximize the cash flow from operations. Intangibles aside, I truly believe cash flow is one of the appropriate measures that can determine a leader’s success.Finance, Leadership categories.