What Can You Learn From A Waterfall? (June 2014)

The other morning my five year old asked what I was doing and I said I was starting to write my monthly newsletter. He said, “Daddy, why don’t you write about our waterfall?” It didn’t take me long to realize that our waterfall is a great analogy for the cash flow of a business and obviously fits nicely with my tag line: Your Cash Is Flowing. Know Where.

Cash flow is critical to a business and much like water flowing in a stream to a waterfall; it’s very difficult to stop the flow. You can divert it, change its path, create a pool, or make use of damns, but you can’t bring water to a stop other than finding a way to shut it off at the source.

There are places along the path of our waterfall where the water seems to be very still, others where it is moving at a moderate place and others where it is crashing over the waterfall with a great amount of force. There are places where the water splits between two different paths and later comes back together. There are still others where it ducks underground for a while and then pops up later. Some of the water takes a very direct path while some meanders from top to bottom. Some dirt and rocks get washed away while some hold firm. Along its journey from top to bottom, the water can carry important things (like sticks and leaves) that we send down from the top to see how long they take to get to the bottom.

Think about your business. Money comes in daily and goes out daily. The key is to make decisions about the outflow of money that maximize the success and profitability of the business. Often this means looking for places where you can stop or slow a rate of spending so that the same dollars can be used elsewhere. It might also mean making a long term investment in capital equipment or technology in order to increase cash flow at a point in the future.

The path to the waterfall has both calm sections where the water seems to be barely moving and chaotic sections where the water has a lot of turbulence. Does your business have periods or perhaps departments that are calm while others are turbulent? The turbulence in the water is caused by rocks that interrupt the smooth flow of the water. Do you have unnecessary obstacles in your business?

We are able to walk along a path beside the waterfall from top to bottom . . . and while I tend to take it in stride, my little guy always finds something new . . . a stray golf ball or a rock shaped like a turtle on our last adventure. If you walk along the path of your business, are you observant enough to find something new with each trip? If not, perhaps you should have someone join you on that walk and see what they observe about your business. Whether it’s something that your firm does exceptionally well or seems to be a practice in need of change, you’ll likely learn something from the observation.

For any business, it’s about getting customer dollars into the top of the flow and managing the path and efficiency of that flow to ensure that you optimize (note that I did not say maximize) company profitability.

Finally, at the bottom of the waterfall is a large pool of water. Think of this as the accumulation of capital resulting from the cash flow of your business. When you look at your balance sheet, can you see the accumulation of capital resulting from your efforts?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]

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