Welcome to the business cash flow essentials course by finna graph. This course is designed to give accountants bookkeepers, advisors, and business owners essential insights and tools to become experts in the art of cash flow management. Why is cash flow management and forecasting so important for every small business? Well according to several recent studies, cash flow matters in every business. 61% of small businesses regularly struggle with cash flow 82% of business failures are due to poor cash flow management. 69% of small business owners have been kept up at night by concerns about cash flow.

And lastly, 43% of all small business owners have been at risk of not paying employees on payday. Let's take a little bit through this first lesson and talk about cash, what it is, what's cash flow and start talking about managing it. So first of all with cash cash is really interesting, right? Because it's something we could spend. It's not necessarily profit profit you might not have in your pocket yet. But cash is king for the reason because you have it.

Now let me describe another term that's associated with cash. That's liquidity. Now, one of the things I don't like to do when I teach is talk about large terms that maybe not everyone understands. But liquidity is simply this. It's the speed that you convert your assets to cash. And I'd like to use the acronyms of water, slush and ice.

What that means is how quickly can we convert assets to cash, cash being water, we want things to be water because it spins really fast. So we're looking at cash, we'll look at cash equivalents. We look at other assets that we have including inventory or AR You can convert those to cash as well. You can convert those to water, but it just takes a little bit of time takes time to collect from your customers. It takes time to sell your inventory. That's what the slush is the slush is when it takes time.

It's not cash, it's not the water, it takes a little bit of time to convert it. Now your fixed assets, your buildings, your equipment, your vehicles, I call that the ice. It's the ice because you can convert it to cash, but it may take a little bit longer than just cash sitting in the bank. We're going to Lesson number two in our business cash flow essentials training course. And today we're gonna be talking about the speed of cash. You know, sometimes we measure speed in miles per hour or kilometers per hour.

But today, we're gonna be talking about the speed of how money moves in and out. We're not talking about cars, we're talking about cash and cash flow these moves in days. So why don't we talk about it because cash flow is that important. You can generate a profit, but you can also run out of money. Think about it this way, you got a very popular company brand new company. They have a great product and it's selling like hotcakes.

As soon as it gets hits the shelf, people are buying it, the company is reordering, which means the people that bought it from you to begin with are reordering because they want to satisfy that demand. And you are selling everything that you can make, maybe even faster than you can make it. You think a company like that could run out of money. They can, you can actually outline your operations, you cannot run your cash flow. So that's what we're going to talk about today is how to manage your cash conversion cycle of the money coming in versus the money going out. One of the things that we talked about is today we're going to talk about analyzing a company actually going through a ratio analysis and I've picked a real life company I've worked with in the past.

It has the financial statements that are listed in the supplemental information. Along with the industry averages, so you might want to get those out, because you can use them to follow along as I go through the ratio analysis. And we'll do cause and effect, we'll do financial impact. And we'll look for the actual problems that this company needs to address. So if you're ready, let's get started. One things I like to do is set up the scene.

So we're going to work with a company called spectrum manufacturing spectrum manufacturing is a 60 year old paint company, what they're trying to do is look for and just as just to give it an example, just to give it a scenario, they're looking for a line of credit of $700,000. But what we're going to do is analyze the company like a banker, like an investor, like a financier would, and take a look at just how healthy this company actually is. Now, a lot of times when I do this, I have people that just start all over the place. There's no methodology for actually looking at a company. So what we want to do is I want to show you right up front on when you get your hands on financial statements. Where do you start?

Right, I see a lot of people start in a lot of different places. So I'm going to teach you a methodology that I call the initial financial indicators, or IFRS. Now I have five, initial financial indicators are just four or five things that you can look at real quickly and get a real good grasp on what's going on in the company. Okay, we should have the ratio analysis worksheet out now. And what we're going to do is go through all 14 ratios. This is taking a deeper dive.

This is the financial analysis that a lot of bankers will do a lot of investors will do To test the health of the organization. how we're going to do that is by looking at, you know, solvency efficiency safety ratios, and we're going to start off with the solvency ratios. This is about how fast do we convert our assets into cash. These are broken out into timeframes. So when we think about current ratio, we're talking about what can I convert to cash within a year that's our current assets. So all your current current assets should be included.

Into this, because they should be able to become cash within one year. The next step down is the quick ratio. This is the 90 day timeframe. What can I really convert to cash within 90 days without discounting it? Right? So that's one of the reasons why they leave inventory out of the quick ratio is that generally in order to sell all your inventory, you have to discount it.

So think about quick ratio as a 90 day part, right? I mean, can't What can I convert to cash in 90 days? So that's kind of the difference. The other one is the cash ratio, which we won't go over today. But cash ratio is what can I get this month? Right?

What can I convert to cash this month? So but let's think about the current ratio and the quick ratio. Under the current ratio. We're going to go to the balance sheet we're looking at year five, and his current assets were about $2,000,049. With current liabilities about 1.5 million. When I think about that, we've got 2 million divided by 1.5 million gives us a 1.35 Yeah, I got 1.35 doesn't mean anything, right?

So because ratios don't mean anything unless you compare them to something else. So when we look at the industry averages that I given you, in the shaded boxes is the number one that number one corresponds to current ratio. You can see there's a number one by current, there's a number two by quick, the shaded boxes will help you find which ones we're actually evaluating. So in this case, sammys company spectrum manufacturing has a current ratio of 1.35. Now, to explain it, I'm going to give you an example of each lesson for the silent killer is a cash flow. More specifically, we're going to talk about these five things Miss financing, inventory management, expense, control, your accounts receivable and your accounts payable.

Believe it or not, these are the types of things that actually suck cash out of your company because you're too busy. A lot of times like I was to just realize what's happening, right? It's one of those things where as you're in your business and you're working on it, and you're doing all the tasks that you do on a normal basis, working with customers on your products on your good, these little little things you don't pay attention to, but they sit there, and they rob your business of cash. So let's talk about how that happens. Every business needs the direction. Where we go should be one of the questions.

We're always asking ourselves as business owners, I see a lot of businesses out there that are forecasting by trying to create an income statement with expected profit. It's a great start, but it doesn't help us with managing cash. Me earning profit and having cash just aren't the same. We have to forecast both. Many owners are skipping this step. Because after all, who can predict the future?

I don't know when customers never pay. Heck, you might not even know when you're going to pay. So it's pretty difficult. That's where forecasting comes in. forecasting is a tool that helps small business owners deal with the uncertainty of the future. I mean, when we talk about forecasting, we might hear words like budget or pro forma.