At the core of the Entrepreneurs' Organization (EO)'s mission is an enduring commitment to engaging business owners at every stage with the tools, education and community necessary to learn and grow. In times of crisis and change, entrepreneurs lead, adapt and endure. To encourage effective leadership during the Covid-19 crisis, EO launched its Virtual Speaker Tour series, featuring thought-leaders sharing expertise with the EO community on topics relevant to business survival and leadership in crisis.

In a recent webinar, Alan Miltz, co-founder of Cash Flow Story, shared his expertise around the importance of cash flow during the crisis. Amanda Ma, founder of Innovate Marketing Group and EO Los Angeles member, found the webinar extremely helpful and shared this summary.

"Revenue is vanity. Profit is sanity. Cash is king."

That's accounting guru Alan Miltz's mantra, and during Covid-19, it's worth repeating--especially the last part.

"At the moment, it's all about cash," Miltz told a group of EO members during a recent Virtual Speaker Tour webinar. "I've been getting calls by the hour from company leaders around the world who are almost in tears. We are now operating in different times."

Job one for entrepreneurs is to dig deeper into their financials and make sure they understand an often misunderstood concept: cash flow. There's a big difference between cash flow and profit. Most young business owners understand profit, but few can describe their company's cash flow to a banker. 

And many are going to need to do precisely that as they scramble for loans to stay afloat until the Covid-19 crisis wanes. Banks want to know if borrowers will be able to pay back loans, and the indicator they look at isn't sales or profit.

So, what's the primary indicator lenders look for to secure loans? Cash flow.

Defining cash flow

"Every single bank you contact will be obsessed with cash flow as a measure of your debt-service capacity," Miltz explains. "At the moment, banks are throwing money at us, but, eventually, we will have to repay the loans."

Very simply, Miltz says, cash flow is "the movement of money in all of your bank accounts." 

Investopedia defines it, similarly, as "the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company's ability to create value for shareholders is determined by its ability to generate positive cash flows."

Maximizing cash flow

Miltz shared a couple of critical recommendations for entrepreneurs. First, every business leader must become conversant in cash flow, ASAP. Second, you need to figure out how to maximize the cash flow in your business.

To accomplish that, business owners must understand that cash flow rises and falls with revenue growth and the strength of management. Revenue growth alone doesn't necessarily boost cash flow. Revenue can go through the roof, but if overhead goes up faster, cash flow suffers

Miltz describes the four significant factors that have a negative impact on cash flow:

  1. Falling margins
  2. Slower collections
  3. Swelling inventory
  4. Paying suppliers too fast

To survive this crisis, Miltz suggests setting up a "war room"--which you may need to do virtually--and include representatives from sales, marketing, operations and finance. You'll want to display the business's metrics prominently where everyone can see them as you discuss your cash flow strategy.

Miltz sits on the board of more than 15 companies, and they are all doing just that. "You can't run a business anymore where the numbers belong to the accountants," he says. Transparency is one key to surviving this crisis.

The role of working capital

Once the crisis eases, banks will come looking for their money. To pay them back, companies will require growth. In order to grow, businesses need working capital, which Investopedia defines as "the difference between a company's current assets, such as cash, accounts receivable (your customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable."

Miltz's company provides software that shows business owners how changes in price, volume, accounts receivable and other factors affect working capital and cash flow. This knowledge can help you determine, among other things, whether your business is more sensitive to increases in price or volume.

Miltz is a proponent of getting past accounting jargon to simplify these complex concepts so that business owners can understand their company's numbers. This can help everyone in your company understand the numbers and work together toward your ultimate objective of improving the company's profit, cash flow and value.

Running a business is like a murder mystery, Miltz says. Unless you dig into your numbers, and challenge every line item, "You will never know the murderer."