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Cash Flow Management, Robert Kiyosaki, Rich Dad
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Rich dad would say, “Cash flow management is a fundamental and essential skill if a person truly wants to be successful in the B and I quadrant. ” That is why he insisted that Mike and I read financial statements of other companies so we could better understand cash flow management. In fact, he spent most of his time teaching us to be financially literate. He would say, “Financial literacy allows you to read the numbers, and the numbers tell you the story of the business, based on facts.”

If you ask most bankers, accountants, or loan officers, they will tell you that many people are weak financially simply because they are not financially literate. I have a friend who is a respected accountant in Australia. He once said to me, “It is shocking to see a perfectly good business go down just because the owners are not financially literate.” He went on to say, “Many small-business owners fail because they do not know the difference between profit and cash flow. As a result, many very profitable businesses go broke. They fail to realize that profit and cash flow are not the same things.”

Rich dad would drum into my head the importance of cash flow management. He would say, “Business owners need to see the two types of cash flow if they want to be successful. There is actual cash flow and phantom cash flow . It is the awareness of these two cash flows that makes you rich or poor .”

One of the skills the game CASHFLOW, Investing 101, teaches is how to recognize the differences between these two types of cash flow . Repeatedly playing the game helps many people begin to sense the differences. That is why the positioning statement of the game is “The more you play this game, the richer you become. ” You become richer because your mind begins to sense the often-invisible phantom cash flow.

Rich dad also said, “The ability to run a company from financial statements is one of the primary differences between a small-business owner and a big-business owner.”

Sharon's Notes

Cash flow is to a business what blood is to the human body. Nothing can impact a business more dramatically than not being able to make payroll one Friday. Proper cash flow management starts on the first day you begin your business. When Robert, Kim, and I started CASHFLOW Technologies, Inc., we agreed that no purchase would be made if it were not justified by an increase in sales. In fact, we often chuckle about our strategy for increasing book sales early in 1998 so we could buy a $300 copy machine. Our strategy worked, and by December 1998 we were able to replace that $300 well-worn copy machine with a new $3,000 one. It is this attention to detail in the early stages of your business that will set the tone for your success.

A good cash flow manager reviews his or her cash position daily, looking at cash sources and needs for the next week, month, and quarter . This allows him or her to plan for any large cash need before it becomes a cash crisis. This type of review is imperative for a company that is growing quickly.

I have listed some cash flow tips that may help you in structuring your business. Each step applies to your business whether it is an international business, a single rental unit, or a hot dog stand.

Initial Corporate Startup Phase:

Delay taking a salary until your business is generating cash flow from sales. In some cases, this may not be possible due to an extended development period. However , your investors will be much more supportive if they see that you are sharing in the development process by “investing your time.” In fact, we advise keeping your full-time job and starting your business part-time. By delaying taking a salary, you can re-invest sales to help grow your business.

Sales and Accounts Receivable:

Invoice your customers quickly upon shipment of goods or when services are provided.

Require payment up front until credit has been established. Require that credit applications be completed before granting credit, and always check references. Standard credit forms are available at business supply stores.

Establish a minimum dollar amount for orders before granting credit.

Establish late-payment penalties as part of your terms and conditions—and enforce them.

As your business grows, to speed up the receipt of cash, you may want to have your customers pay their bills directly to lockboxes or directly to your bank.

Expenses and Accounts Payable:

Many businesses forget that a crucial part of cash flow is managing their own bill paying. Make sure you pay your bills promptly. Ask for extended payment terms up front. After you have paid timely for two to three months , ask for additional extensions on your payable terms. A supplier will usually extend credit for 30 to 90 days to a good customer .

Keep your overhead to a minimum. Before purchasing something new , set a goal for increasing sales to justify the expense. Preserve your investors' funds for costs directly related to business operations, not overhead, if at all possible. As your sales increase, you can purchase the overhead-related items from the cash flow—but only if you have set and achieved new higher sales goals. General Cash Management:

Have an investment plan for your cash on hand to maximize its earning potential.

Establish a line of credit with your bank before you need it.

To make sure you can move quickly to borrow if needed, keep an eye on your current ratio (assets over liabilities—at least 2:1 is good) and quick ratios (liquid assets divided by current liabilities—should be over 1:1).

Establish good internal controls over the handling of cash.

The people who record the cash receipts on the bank deposits are different from those who post it to the accounts receivable and general ledger.

Checks should be endorsed immediately “For Deposit Only.”

The people authorized to sign checks should not prepare the vouchers or record the disbursements and post to the accounts payable and general ledger .

The person who reconciles the bank statement should have no regularly assigned functions related to cash receipts or cash disbursements. (Our outside accountant does this.)

While this may sound very complicated, each step of cash management is important. Call on your accountant, banker , and personal financial advisor for advice in structuring your cash management system. Once you establish a system for how to manage your cash, ongoing supervision is still essential. Review your cash position and funding needs daily, and prepare early for additional funding that may be required for your expanding business. Many people lose sight of cash management when their businesses become successful. This is a major cause of business failures. Proper cash management (and therefore expense management) is crucial to the on-going success of any business.

For those of you considering purchasing a franchise or joining a network marketing organization, you may find much of the cash management system will be provided for you. With a franchise, you will still need to implement the system and oversee it. Network marketing organizations often handle the cash management on your behalf . In these cases, the corporate headquarters performs the accounting functions for your organization and sends you a report of your earnings periodically with payment. In either case, it is still important to have your own advisors to help you structure your personal cash management.

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