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Its Not Rocket Science

Sep 30, 2009

A number of years ago, I was a partner in a small business. Our bank was sponsoring a one day workshop called Accounting for Non-financial Managers. My partner was going to attend. Jack, by education and training, was very much a marketing person (he was involved in a number of nationally known ad campaigns and slogans). More than anything else, he hated the idea of not being prepared. As a result, he spent several hours going through the course materials in the days leading up to the workshop. 

The night before the workshop, he came into my office. He indicated that he was unsure about the definition of cash flow. He spent the several minutes giving me a dissertation on what he thought it was. He ended it by showing me a formula that looked something like this:

 

I studied it for a few seconds and then proceeded to the whiteboard and wrote down step-by-step instructions for determining the cash flow of our business:

  1. Come into the office Monday morning and determine the checkbook balance.
  2. Pay bills and make deposits during the week.
  3. Friday afternoon at 5:00, look at checkbook balance and answer the question - how it compares to the previous Monday morning?

 I turned to him and said, “Simply put, if our cash receipts are greater than our disbursements, then we had a positive cash flow for the week. We are a small business, don’t over analyze it. This isn’t rocket science.”

 

[Editor’s note: The author is incorrect. The formula cited above is rocket science. It is known as the Tsiolkovsky Rocket Equation named for Konstantin Tsiolkovsky, a Russian scholar, who described his theory in a scientific paper published in 1903. It is a mathematical equation that relates the delta-v with the effective exhaust velocity and the initial and end mass of a rocket.]

 

The next day, Jack went to the workshop and the instructor asked for the definition of cash flow. A number of participants proceeded to give answers worthy of a Harvard Business School Case Study. When he got to my partner, Jack repeated the explanation that we covered the night before. The instructor exclaimed, “That’s it! You are small businesses owners. Don’t make it more complicated than it should be!”

 

If you are trying to simplify your monthly reporting and processes, call Ed Baloga for a no obligation review of your business, at 914.474.9547 or via email at ebaloga@b2bcfo.com.

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