Warning! Profit Does Not Equal Cash!
My last two blogs have been about the first two surefire methods for improving cash flow. They were:
We’re now on to the third method that I’ve found has helped companies achieve positive results in cash flow and profit, and that’s about the relationship between profit and cash.
First, let me assert a very important warning: Profit Does Not Equal Cash!
Grabbing hold of this idea will significantly boost your Financial Intelligence! You may already know this, but WHY is it true? If your business model is to receive cash at the time of each sale, then turn around and pay for the costs related to that sale (i.e. cost of the goods sold, payroll for producing the goods or service), and pay all bills as you receive them, then yes, Profit = Cash.
However, I’ve NEVER seen any growing business with this model.
Instead, most of us purchase or produce goods before the sale (Inventory), allow customers to pay over time (Accounts Receivable), and we also have to have the proper equipment to produce the goods or service (Fixed Assets, Payroll, Accounts Payable).
So as your business grows, managing profit and cash flow requires focus on 2 very separate concepts: Profitability & Cash Flow. Not understanding and managing this fundamental statement (Profit ≠ Cash) contributes to the high failure rate of businesses.
The story continues, and my next couple of posts will explore the final two methods, which are:
- The Secret: Your Financial Score Card is Not Secret
- My Favorite “F” Word
You’ll have to wait a couple of weeks for this intel, but if you’re itching to learn about them now, just give me a call or send me an email.