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by EBJ

Is Cash Flow Really More Important than Your Mother?

November 26, 2010 in Financing, General by EBJ

No! Don’t be naïve! When Kenneth Morse, co-founder of 3COM and former managing director of the MIT Entrepreneurship Center said that he must have been really frustrated at how much startup companies neglect their cash flows or don’t realize their importance, I suppose it was a desperate attempt by him at making them understand. And still, a lot of them just don’t even know what cash flow is!

Cash flow is the blood that circulates in your company’s veins, it cannot survive without it. Concretely, it is a reflection of whatever cash movements affecting your company or undertaken by it for a certain period of time.

Here’s a little homework for you that will help you understand. Just as your mother (who is more important than your cash flow) used to teach you while you were in kindergarten:

All happens within a precise period of time and all questions are related:

1-      You start with no cash and you make sales for $100,000 but your good Lebanese client pays you only $30,000. How much cash do you have after the transaction?

2-      You buy a new machine for $40,000 but only pay your supplier $20,000. By how much did your cash vary and in which direction? How much cash do you have now?

3-      Tricky one: The machine you have bought is now used and therefore its value has depreciated by $10,000. How does this affect your cash, and how much cash do you still have after?

If you’re able to answer all three questions, then you have understood what cash flow is. Answers next week, with some more tutoring. Now, go home and ask your mom to help you with your homework, then tell me which is more important, your cash flow or your mother!