Your Origami Monthly Report is a simple and succinct summary of the most important numbers in your monthly financial statements. These posts help you understand and use the information in this report to manage and steer your business.
The cash flow section of your Origami Monthly Report shows you two things: how much cash you have on hand (cash balance) and how much cash you've generated from your business activities (operating cash flow). As small business owners, we're always watching cash flow. We know that you're going to be doing the same. So we put this information right up front in your monthly report: in the email and the attached PDF.
In this post, we're going to cover some points to help you understand the cash flow section of your Origami Monthly Report:
Profit vs Cash
Profit is the bottom line of your income statement. Simply put, it's the difference between your sales and your expenses for a given period. There are a lot of accounting rules that go into determining what counts as sales and expenses and when those things should be counted. We don't need to get into that here. What we do need to keep in mind is that because of those accounting rules, profit and cash are two different things.
You can have a profitable business that's running out of cash. Suppose your business is able to sell its products and services for more than it costs to produce them. Great! Your business is profitable. Let's further suppose that you're selling on credit and your customers are taking a long time to pay you while you're paying your suppliers right away. And let's also suppose your business is growing. You're buying more raw materials and hiring more people to produce more products and services.
All of that takes cash. You need cash to pay your suppliers and your employees. You need cash to buy more raw materials. You need cash to pay your rent and your utilities. You're profitable (on paper), but those profits aren't turning into cash fast enough to cover the expenses you need to pay right now. In this situation, you're going to need to borrow money from creditors or raise money from investors to keep your business going.
You can also have a business that's losing money (that is, it's unprofitable) but has plenty of cash on hand. With small business, this is usually a sign that you've stopped paying attention. If your business has plenty of cash on hand, it had to have come from somewhere. Let's assume it came from past profits and not investors or creditors. Critical thing here is that those profits are in the past. Because now you're in a situation where your business is losing money. You're spending more than you're bringing in.
The discipline it took to build up a nice cash balance has gone AWOL. Your headcount is too high. Your marketing ROI has slipped. You're not chasing sales the way you used to. Your overhead keeps creeping up. Eventually, if things don't turn around, you're going to burn through that cash balance it took blood, sweat, tears, and years to build. So you're going to have to get back to paying attention and managing your business for profit and cash.
Cash Balance
The cash balance number in your Origami Monthly Report is the amount of cash you have on hand at the end of the reporting month. You can find this number under Current Assets on your balance sheet. Your cash balance includes cash in your bank accounts and cash equivalents like short term investments that can be converted to cash quickly. It doesn't include money you've invested in long term securities. And it doesn't include the cash owed to you by your customers (that goes into accounts receivable on your balance sheet) or the cash you've invested in inventory and fixed assets (other balance sheet accounts).
Operating Cash Flow
Operating cash flow is an important number to watch. It tells you how much cash your business is generating from its day to day activities as opposed to cash inflows and outflows related to your investing and financing activities. The purpose of your business is to make a profit and generate cash. Over the long term, your profits and your operating cash flow should be in sync, that is, your profits should be turning into cash.
If your business is profitable, you want to see your operating cash flow also positive and increasing over time. If operating cash flow isn't in sync with your profit, you'll want to dig into the details to find out why; whether it's a one time blip like when you pay a large tax installment, or whether there's a bigger issue with increasing balances in accounts receivable or inventory. Operating cash flow is a tricky topic. Remember, your Origami team is always available to answer your questions.
Cash Flow Statement
Here's an example summary cash flow statement, like the one you'll find on the second page of your PDF report. You can click on the row labels or the column headings to get more information on what the report is telling you.
| This Month | Last Month | Last 12 | |
|---|---|---|---|
| Operating | 9,000 | 7,000 | 64,000 |
| Investing | -4,000 | 0 | -18,000 |
| Financing | 2,000 | 1,500 | 7,000 |
| Net | 7,000 | 8,500 | 53,000 |
Operating
This row shows you the cash your business generated through its regular activities for each of the periods listed. While monthly results may vary because of one-time transactions, the number you'll want to watch is in the Last 12 (trailing twelve months) column. If that number keeps going up month to month, then your business is going to be in good shape.
Investing
This row shows you the cash your business has used (or raised) through its investing activities. Your fixed asset purchases will appear here. So will any cash you've raised from selling fixed assets. If you're investing in your business by buying more equipment or opening a new location, you'll see the cash outflow here.
Financing
This row shows you the cash your business has used (or raised) through its financing activities. Your loan payments will appear here. So will any cash you've raised from issuing shares or taking on new loans. Remember that, as with most small businesses, you're most likely going to be the primary creditor as well as investor in your business. So any money you've put into your business will appear here as a cash inflow. And any money you've taken out of your business will appear here as a cash outflow.
Net
This row shows you the net cash flow for each of the periods listed. It's the sum of the operating, investing, and financing rows. If this number is positive, your business is generating cash. If it's negative, your business is using cash. Your cash balance at the end of the period will go up if this number is positive and down if it's negative.
This Month
This column shows you the results for the report month.
Last Month
This column shows you the results for the month prior to the report month. It's a handy way to see if the current month's results are in line.
Last 12 - Trailing 12 Months
This column shows you the totals for the past 12 months. Your monthly results will tend to bounce around: good months, not so good months. The numbers in this column give a smoother picture of how your cash flow numbers are trending. You should check your monthly numbers for short term feedback and your trailing 12 months numbers for a sense of the direction your business is heading.