How Are We Managing Financial Risk?įamily businesses manage financial risk through capital structure or deciding how much money to borrow. It is not unusual for companies to oscillate between planting and harvesting over time, so a format like that in Exhibit 1 can be used with either historical or prospective cash flows, depending on what message you need to convey to your family shareholders. Your family shareholders should know what time it is for your family business, and why. Examining cash flows on a rolling three- or five-year basis helps to eliminate the “noise” that may creep into the results for a single year in which a major capital expenditure of acquisition is completed.

Since investing cash flows are often lumpy, we find it best to look at the statement of cash flows on a multi-year basis. For family businesses in harvest mode, the opposite is true, and operating cash flows are greater than investing cash flow. If the investing cash flows (the money being put into the business) exceed the operating cash flows (the money coming out of the business), it is planting time for your family business, as is the case in Exhibit 1. The investing cash flows represent the amounts reinvested in the business (generally either through capital expenditures or business acquisitions).Įxhibit 1 illustrates how the investing and operating cash flows interact to reveal the “time” for your family business. The operating cash flows are those generated by the existing operations of the business. Comparing the operating and investing cash flows reveals what time it is for your family business. The statement of cash flows allocates the cash flows of your family business into three categories: operating, investing, and financing. But at any given time, a family business is either planting or harvesting, and the statement of cash flows tells us what time it is. Family businesses are not tied to the cycle of seasons.

First, what time is it? Second, how are we managing financial risk? What Time Is It?įor farmers, the changing of the seasons dictates whether it is time to plant or time to harvest. You can discern the basic plot of your family business by answering two questions. But for those who know what they are looking for, the statement of cash flows reveals what a company is really up to. The statement of cash flows is the least understood financial statement, so family leaders often ignore it when attempting to communicate financial results to their family shareholders. More than any other financial statement, the statement of cash flows reveals the basic plot of your family business. Yet, despite their many unique attributes, there are only a few basic underlying plot structures that family businesses follow. Like stories, no two family businesses appear the same, as demonstrated by the old saw that if you have seen one family business, well, then you’ve seen one family business. Booker’s thesis is sound or not, but we have long suspected that something similar is true for the family business. With respect to literature, we have no idea whether Mr. While details of character, narrative perspective, setting, and the like can make stories appear quite different from each other, any story can ultimately be reduced to one of a handful of basic plots. According to author Christopher Booker, all stories fit into one of seven basic plots.

Family cashflow