An introduction to the Cash Flow Quadrant For Business Owners
What quadrant is your business in?
Years ago, when I spent most of my time working with entrepreneurs to help them secure financing so they could turn their companies around, I needed a quick way to understand their financial and operational status. Every entrepreneur (including myself) views their business through a subjective filter that influences what they focus on and the results they achieve. As someone who works with entrepreneurs to change outcomes, I developed a cash flow quadrant for business owners that removes subjectivity and provides clear direction for where an entrepreneur needs to focus.Read more: Cash Flow Quadrant For Business Owners – An Introduction
There are four basic positions a business can find itself in when it comes to cash:
- No cash and negative net profit
- Cash in the bank and negative net profit
- No cash and positive net profit
- Cash in the bank and positive net profit
Cash in this context does not include loans, investments or financing advances. Net profit is the money left over after expenses are subtracted from sales.
No cash and negative net profit
A business that has no cash and negative net profit is a business that is struggling to survive. A company in this position needs to focus on determining the viability of surviving. Once in this position, an owner has to decide to close the business or seek the necessary capital to help the business return to profitability.
Cash in the bank and negative net profit
A business that has cash in the bank but has negative net profit is a business that is adjusting to its circumstances. A company in this position needs to focus on generating profits, requiring changing the business model, products, services, or people. If an owner cannot do this, their company will eventually struggle and become unviable. Conversely, an owner that can make the adjustments needed will find itself on a growth path.
No cash and positive net profit
A business that has no cash but has positive net profit is a business that is growing and is reinvesting all of its money into expenses that can help it increase its income. A company in this position needs to focus on managing its income and expenses to ensure the company has enough cash to meet its objectives. If managed well, an owner will find themselves in the inevitable position of being able to make strategic investments that can exponentially increase their cash. If an owner cannot manage the income and expenses associated with growing, they will find themselves having to make adjustments to ensure the survival of their business.
Cash in the bank and positive net profit
One of the many reasons owners build a business is to produce financial security through stable cash flow and a return on cash invested. A business that has money in the bank and is generating positive net profit is a business that can provide an owner with the resources they need to make the investments they want.
The opportunity to start, run and grow a business is a meaningful and worthwhile endeavour. Profit is an intangible feedback loop that tells you how well your company uses its resources. Cash is a tangible feedback loop that tells you what resources your business has access to. When managed well, a business owner can achieve the unachievable.
The cash flow quadrant for business owners is a guide to understanding what a business doing with its cash flow.