Finding Actionable Intel in the Cash Flow Statement
We teach in our training class that cash is not the same as profit. While a company can be profitable and have no or very little cash, they can also have plenty of cash and no profit. We also teach that both cash and profit are very important. To run a company effectively, you must have cash flow. But to stay in business and attract investors you must have profit.
I believe if a company can generate plenty of cash and little or no profit, they need to understand how to control their expenses. (This, of course, is generally good for you because most of you sell solutions that help reduce expenses). In fact, actionable intelligence can be gained by understanding a company’s profit. Are revenues trending up to generate profit, or are expenses contracting? Based on your value proposition this could impact your approach.
The cash flow statement has three sections: Operating activities, Investing activities, and Financing activities. Each contains actionable intelligence you can use to start or further a conversation.
Operating activities track the cash outlays from operations. This means all the cash in and out that is related to operating the business. It includes cash received from invoices, and cash paid out for things like utilities, rent, and salaries. You want to pay attention to their trend. If the operating activities are trending up, the company is doing a good job of turning profits into cash. If it is trending down, they are likely financing the operations by borrowing money or selling stock. From an actionable intelligence standpoint, this can be a key factor in determining your sales approach.
The next section of the cash flow statement is Investing Activities. Investing activities include acquisitions of financial securities and anything that involves buying or selling a company asset. The actionable intelligence is in how much they are investing. If the number is small compared to the size of the organization, it may not be investing at all, and they could be sucking the cash out of the company. If the number is high compared to the size of the company, they may be a bit about investing in the future. Keep in mind; you may want to look at comparably sized organizations to determine how to define high and low. Technology investments typically fall under a category akin to “purchases of property and equipment.” Reviewing this with “property, plant, and equipment” on the balance sheet (and any provided notes) is the best place to get a sense of CapEx spend.
Financing activities refer to borrowing and paying back loans and transactions between the company and its shareholders. Financing activities tell us how much the company relies on outside financing to run the operations. It is critical to look at this number over time. The trend will tell you if they are borrowing more than they are paying back. You can also see if they are buying their own stock or selling it to outside investors. Again, this intelligence should help you with understanding the prospect’s ability to spend.
Finally, we suggest you take the time to calculate “Free Cash Flow” (Operating cash flow less net capital expenditures). A healthy free cash flow gives the organization several options for spending cash. They may want to expand the company, make an acquisition, pay off some of their debt, or they could buy back stock. When a company has options, it makes it easier for a financial buyer to make a buying decision.
Don’t ignore the cash flow statement when you are assessing a company’s ability to buy from you. There is great actionable intelligence you can use to determine your sales approach, the company’s ability to buy from you, and to know when to exit a pursuit that will ultimately be a waste of time.
