Profits and Cash are not the Same

Many business owners are stumped because their Profit and Loss Statement shows a profit month after month but they are having trouble paying their bills. Further, in busier months, their Profit and Loss Statement shows a loss.

Profits are just that-your revenues are greater than your expenses. Showing a profit doesn’t mean you have cash. A Revenue or Sale turns into Accounts Receivable when the company bills for the work performed. Then the company must collect for the work.

Here are 4 ways profitable companies go broke:

  1. Doing profitable work but not collecting for it (but the company paid  employees and suppliers.)
  2. Doing work that isn’t profitable (covering direct expenses, overhead and a profit.)
  3. Doing a small volume of work to spread the costs across so there is little economy of scale-too little volume.
  4. Purchasing too much inventory that isn’t generating income but sitting in a warehouse.

As a general rule of thumb: A company needs 10% of its projected growth in cash to fund the growth. This cash should be used for inventory, increased accounts receivable, increased overhead and possibly an additional employee or fixed asset purchase.

Profits don’t pay the bills; however, profitable jobs are necessary to pay the bills. Collect for profitable work quickly, pay the bills associated with that job and stay solvent.

What do Blockbuster and Borders have in common?

Companies like Blockbuster and Borders couldn’t match the lower prices or service of online retainers so they filed bankruptcy. Being a successful business owner means you know how you compare to your competition, what makes you different, you know your profit margins by revenue segment and you are on top of your collections. This knowledge of financial metrics is important to a business’ success. Many business owners say, “I don’t have time for that” or “I don’t know how to measure my business.”  Companies like Publix Super Markets or Starbucks continually maintain a pulse on their competition and their customers’ interests. Know your competitors and your customers so you stay current with what your customers want from you and what they are seeing elsewhere. We can help business owners determine their metrics and measure them to ensure continued success.

Quick tips for increasing cash flow

Here are a few tips to increase your cash flow:

-Minimize Accounts Receivable by billing timely, using incentives to get customer payments faster and follow up on collections

-Keep inventory at a manageable level

-Look at your customer base and focus on your most profitable products/services

-Great Customer Service=More Sales

-Require at least 50% payment at time of order and the remaining balance due at delivery