Do you know any startup CEOs who were able to remain at their jobs despite their companies going through severe cash flow problems? Probably not. A CEO whose company suffers such cash flow management problems likely didn’t remain a CEO for very long – at least not at that company. The number one responsibility of that position is to make sure that company doesn’t run out of money – that their cash flow is positive and they remain afloat.

The problem for CEOs in remaining cash flow positive is that they simply can’t track all the comings and goings for their company’s money. Running a company is a complicated beast! There’s a lot of cash changing hands in both directions. How can a CEO possibly know if their cash flow situation is becoming dire?

With a Cash Waterfall report.

The Cash Flow Challenge CEOs Face

Most companies currently report and produce their Cash Flow Statements via the Indirect method where they…

  • Start with their net income, as reported by their income statement
  • Works backward and makes adjustments to this income figure
  • Takes into consideration all non-cash items, including credit payments
  • Converts this total net income to an actual cash amount

This is the easiest way to produce a cash flow statement in Quickbooks, and is generally easy. However, the Financial Accounting Standards Board (FASB) prefers the Direct method. This method is more straightforward to digest, but tougher to do in Quickbooks. It identifies a company’s various sources of cash inflow and outflow, beginning with the cash paid by customers. It typically includes three sections:

  • Operating expenses – receipts and payments from normal business operations, such as paying employee salaries and vendors
  • Investing – the purchase or sale of long-term assets and investments
  • Financing – money that is borrowed – such as from the bank – to make payments to creditors, shareholders and investors

To get a Direct Cash Flow statement from Quickbooks is exceedingly difficult, without which a company cannot produce a Cash Waterfall report like this one below:

This is an extremely powerful view and report for CEOs, CFOs and company accountants. It tracks literally everything involving a cash transaction that happened over a given time period, in this case the past week. As you can see, there are typically a lot more areas where cash is going out than it is coming in (via customer payments or, in rarer cases, large influxes through funding rounds).

Running a company is expensive, especially at a high-growth startup. Incoming revenues will typically not be as consistent as the amount of cash going out to pay third-party vendors, utility companies, bank services, cleaners, insurance providers and – of course – employee salaries. With so much outflow, it is absolutely critical that CEOs and CFOs track this right down to every dollar, so they can ensure their company remains afloat at all times and never approaches the danger zone of running out of cash.

Irresponsible CEOs who don’t have visibility into their company’s cash flow in both directions will not be long for their jobs. Don’t be one of those CEOs – know exactly where all your money is going and you will be able to pull the right levers and make the best decisions.

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