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Key Performance Indicators – Quick Cash Flow

One of the most important things to measure is cash generated from operations each month, and I like to do this in two stages. The first stage is to turn the P&L into Cash Generated from Operations. The second step is to produce a statement that I call Quick Cash Flow – an approach which links the Profit and Loss and the Balance Sheet in a very effective fashion.  Click here to complete your own analysis.

The goal here is to start with the Profit and Loss Statement (assuming it is produced on an accrual basis) and turn it into Cash Generated from Operations. Once that is done, you can overlay the balance sheet impact by bringing in the net working capital change and any balance sheet items that have a cash impact and generate the Quick Cash Flow statement. 

Remember, we’re not creating “financial accounts” here for the IRS or the Bank to be used much later, but something to help the owner steer the ship and make mid-course corrections to avoid hitting the iceberg.

Cash Generated From Operations

To measure this you need to start with the monthly “net profit” (or loss) figure produced using accrual accounting. Then make adjustments to reverse all non-cash expense numbers contained in the P&L. For example:

·         Add back non-cash items expensed but not paid in cash (depreciation, amortization, accruals etc)

·         Add back any interest accrued but not paid

·         Add back any Tax accrued but not paid.

The result is the amount of cash actually generated from operations before taking into account the impact of balance sheet items.

A useful KPI to generate from this can be to measure  

Then apply the following adjustments for any cash payments that have been made that do not appear in the P&L. 

·         Deduct any payments made to banks for loan amortization (but not interest as that is already in the P&L)     

·         Deduct any other capital repayments  

Quick Cash Flow

When you reach this point, it is time to deal with the balance sheet items and the following adjustments need to be made relating to movements in current assets/liabilities:

Deductions

·         Deduct any increase in receivables

·         Deduct any increase in inventory

·         Deduct any reduction in payables

Additions

·         Add any decrease in receivables

·         Add any decrease in inventory

·         Add any increase in payables

The resulting figure is Quick Cash Flow and should be tracked monthly

Sample Quick Cash Flow

QUICK CASH FLOW (QCF)

           
                 

Period

1

2

3

4

5

6

                 

Net Profit (From P&L)

$1,000

$1,200

$1,300

$900

$800

$1,000

                 

P&L Add Back

           
                 
 

Depreciation

$100

$100

$100

$100

$100

$100

 
 

Amortization

$100

$100

$100

$100

$100

$100

 
 

Other non-cash expenses

$50

$50

$50

$50

$50

$50

 
                 

P&L Deduction

           
                 
 

Loan Amortization

$100

$100

$100

$100

$100

$100

 
 

Non-Cash Income

$100

$100

$100

$100

$100

$100

 
                 

Cash from Operations

$1,050

$1,250

$1,350

$950

$850

$1,050

                 

Balance Sheet Cash Sources

           
                 
 

Decrease in Receivables

$1,000

$0

$0

$1,000

$0

$1,000

 
 

Decrease in Inventory

$0

$0

$0

$0

$0

$0

 
 

Increase in Payables

$200

$100

$0

$200

$100

$200

 
                 

Balance Sheet Cash Uses

           
                 
 

Increase in Receivables

$0

$1,000

$500

$0

$1,000

$0

 
 

Increase in Inventory

$500

$500

$500

$500

$500

$500

 
 

Decrease in Payables

$0

$0

$300

$0

$0

$0

 
                 

Quick Cash Flow (QCF)

$1,750

-$150

$50

$1,650

-$550

$1,750

                 

Cumulative QCF

$1,750

$1,600

$1,650

$3,300

$2,750

$4,500