Brad Farley, president of a $62 million-a-year building supplies business with two locations in the Southwest, got the best-and shortest-cash flow lesson of his life some 30 years ago.
Not long out of college, he was intent on dazzling his new employer, the company's founder, with an intricate, chart-filled presentation of his cash flow projections for the company. The founder sat through the presentation attentively, then offered Farley a succinct bit of advice: "Just remember one thing, son. If more money comes in than goes out, we're going to be successful."
That might be the Occam's Razor approach to cash flow modeling, but as the owner of nine successful businesses, Farley's then-employer is well qualified to wield it. As Farley, now a partner in the business, puts it, "It's a one-liner, but it's the theory we've embraced ever since, and it's paid off."
Business gurus keep trying to outdo each other in coming up with colorful ways to characterize cash flow's importance. The Department of Applied Economics and Management at Cornell University, for example, maintains a Web site called "Cash Flow Is More Important Than Your Mother."
Hyperbole aside, it's almost impossible to overstate the importance of a healthy cash flow to any successful business. "It is the lifeblood of most businesses," says Marty Grace, a senior vice president in loan administration for a leading commercial bank in the South. "Without adequate cash flow, no business can function efficiently."
The cash flow cycle is the process by which money moves into and out of a business. The business expends cash to create goods or generate services which are then sold to customers. In turn, the business collects cash for the sales from its customers and uses it to create more goods or services, starting the cycle all over again.
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