Remember, according to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A whopping 80% crash and burn. And yes, at surface level, the primary reason businesses fail is they simply run out of cash.
Here are a few other interesting statistics:
- 90% of all businesses fail within ten years.
- The average swing from the bottom of an economic cycle to the top is ten years.
- 90% of all business owners don’t read or know how to read a financial statement.
Last week we talked about P & L’s and what they don’t talk about, cash.
What do they talk about?
They talk about “profits” (or losses).
With my simple mind, I would think profits and money (cash) are the same things.
It turns out they are not.
How many months have you looked at a P & L, and it said something like this.
Income: $50,000
Expenses: $20,000
Net Income: $30,000 (profit)
Great, I have $30,000 in my account, and it is time to pay the mortgage payment, but there is not $30,000.
Here is why. It turns out “profits” are not the same as “cash.”
I finally learned our P & Ls are not even what our real profits are. It is the theory about our profits are.
Your P & L is like a snapshot, a photo detailing what, in theory, your “profits” were over a given time frame.
You can’t spend “profits.”
You can spend cash, not profits.
It turns out that some of the expenses have been paid, some haven’t. Most of the world uses “accrual accounting.” Even in self-storage, at least for the expense’s accrual accounting is often used. In other words, when the bills arrive, they are posted in Quickbooks or sone accounting software.
At that moment, they become expenses.
Some “expenses” are paid with cash, some are paid with an IOU (a credit card, for example), and some are paid next month, or in the case of property taxes, once a year. Yet, all of them are “expenses” in that time period.
If you only paid them when you felt like it or when you felt like you had enough “cash,” (1) your lights would most likely be turned off, and (2) you could not get any useful information when you looked at a financial statement, like was your income more or less than the cost to run the project.
Some of your income may have come to you in cash. Some may have come to you in the form of an IOU (accounts receivable, i.e., A/R). Yet, that’s all “income” in that time period.
You see, that number we rush to look at the bottom line is a theory—the theory about the profits your business makes.
It is an important theory. For example, if this number is negative consistently, your P & L informs us our business model is not working. But remember, the P & L does not tell you how much cash you are making or losing.
Remember, you can’t spend profits.
That is where another report comes into play you rarely see. That is the “Cash Flow Statements.”
What is so weird is I always have to ask for them.
The Real Health Of A Self Storage Facility (or any company)
If you look at the bottom of your P & L, you will see a number.
“Profit.”
The real health of your company is not how much profit you create but how effective you are at turning that profit into cash.
And not just any kind of cash, but a certain kind of cash.
You see, it turns out not all cash is created equal.
There are three kinds of cash. (1) Operating Cash, (2) Investment Cash, and (3) Financing Cash.
Which cash do you think is better?
Yes, you guessed it, I am sure.
Three Types Of Cash
Your Cash Flow Statement measures three types of cash in any given time period. Any accounting software, like Quickbooks, easily generates Cash Flow Statements.
Let’s look at the three types of cash.
Operating Cash
The first type of cash is “Operating Cash.”
This is cash that is made in that time period by rent or sales, and/or my having someone pay you what the owed you from another time period that you collect on an IOU (called A/R-accounts receivable).
Most of us use operating cash to pay bills due in that time period, or you can give yourself an IOU for a bill (called A/P-account payable).
Investment Cash
Your Cash Flow Statement also measures the second type of cash, “Investment Cash”.
Investment cash can be made by selling some of the “Things or Stuff” that are on Your Balance Sheet.
We will talk about Balance Sheets next week. They always occurred like a mystery to me.
Back to Investment Cash, on your Cash Flow Statement, what the accountants call PP&E (property, plant, and equipment) is what usually shows up under this type of cash.
It could also be spending Investment Cash by buying PP&E during that time period.
Financing Cash
The third type of cash there is “Financing Cash.”
Financing Cash can be made by borrowing from a bank or raising cash from investors, and it can be spent by paying down a loan or paying back investors (called paying a “dividend”).
The Cash Flow Statement looks like this:
| Beginning Cash: | _____________________ | |||
| Operating Cash: | + | |||
| – | ||||
| Investment Cash: | + | |||
| – | ||||
| Financing Cash | + | |||
| – | ||||
| Ending Cash: | _____________________ | |||
Your P & L is like a photo, capturing, let’s say, your financial picture at 11:59 PM on the last day of the month (or year).
Your Cash Flow Statement is like a movie. It is a movie about what happened to your cash over the time period you are measuring.
Now given cash is the most important thing for a business owner, don’t you think it would be the most important part of a financial statement?
I do.
But we rarely, if ever, see it unless we ask for it.
You see, most CPAs and bookkeepers are not that interested in your cash.
You are.
They are interested in your taxes, and you pay taxes on profits, not cash.
But, as a business owner, you can’t make as informed decisions on profits as you can on cash. I thought you could for years, but you really need to know your cash position more than your profit position.
Yes, it is important to know your profit position to design specific tax strategies to reduce your tax liability, but that presupposes you are still in business by knowing your cash position.
Fortunately, we are in the game of self storage. This is a game that is not that complicated and usually generates lots of cash.
Once we alter our relationship to financial statements, they can begin to inform you as to what we can do to get more cash.
Next week we will look at the third piece of a financial statement and tie them all together, so you have another way to look into your self storage business.
