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Can Advisors Create Value Just By Knowing: What Is Cash Flow?

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Over my years in business I have had the privilege of working with a lot of really smart entrepreneurs. I'll take a minute and clear out any doubts right now, all of them were much, much smarter than me.

In knowing all of these great business people and watching them build their passions, I always found one observation very interesting: despite all of their business acumen, a number of these entrepreneurs didn't have a strong handle on the basics of what I would call "fiscal literacy".

Clients Can Be Fiscally Illiterate

First, let's clearly state that fiscal literacy can mean a lot of things. Understanding of financial statement concepts, knowledge around financial modelling and so on. But in this case, by fiscal literacy, I quite literally mean that most of these smart small business owners would incorrectly use financial or accounting terminology where they shouldn't.

A favourite and real example of mine was when a business owner described their EBITDA as Net Profit... when they actually thought they were talking about cash flow.

In the past, hearing these financial missteps out loud really reinforced my appreciation that while our clients were experts in their field, they definitely hired us because we were experts in ours.

And with that realization came one simple, but powerful lesson: if you master all aspects of your trade, including terminology, you can drive tremendous value.

Start Being A Cash Flow Expert By Truly Knowing The Terminology 

I can appreciate that learning definitions and phrases might seem trivial to some. But the path to mastering any subject is learning. And the first step in any learning journey is to build out your foundation.

This is a key reason that we start Helm's Definitive Guide to Cash Flow Advisory with a simple answer to the question "What is Cash Flow?" and then moves on to define and compare other phrases within the cash flow vernacular. Concepts like:

  • Net Income (both cash and accrual based)
  • Operating cash flow
  • Free cash flow

Cash flow is a misunderstood and underserved space. We want our users and readers to understand that that there are reasons these terms exist and are used, and also that none of the bullet points above are actually measures of true or total cash flow.

Create Value Using Your Cash Flow Literacy

Let's tie this all together. You:

  • know that "cash flow" is the answer to the question "why do businesses fail?" (at the very least you do now)
  • have clients that have some level of fiscal illiteracy (why else would they hire you?)
  • have taken the time to properly learn cash flow concepts

You now have the ability to start and engage in cash flow conversations with your clients in a meaningful way. When a client asks why their net income is high but there's never any money in the bank (i.e. low cash flow), you can highlight the difference between the two measures. When a client wants to know how much bank financing they can take on, you can better walk them through metrics used by lenders (debt service coverage ratios often include cash flow concepts in the numerator).

As we teach our Accelerator Program members, the value in any product or service isn't defined exactly by what we provide, it's more so by what the customer feels they received. If you can highlight your expertise by filling gaps in your clients fiscal literacy, it's an easy win for everyone.

An easy win for accounting professionals: creating value by simply knowing cash flow terminology.