Why Cash is More Important Than Profit
One of the biggest reasons businesses fail is that they run out of cash.
At the end of the day, it’s not the amount of money that you make that matters, it’s what you keep.
Consistent and predictable cash flow allows a business to keep its operations going. I have worked with many clients over the years who continue to turn a profit and yet still struggle to cover their bills and payroll every week. One of the questions I’m asked the most is “If I’ve made money this month/year how come I don’t have the cash to show for it?” Sound familiar? The truth is there are several things that contribute to your cash flow that aren’t going to show up on your profit and loss statement. If you feel tight on cash here are a few things that may be the culprit, and some suggestions to help turn things around.
Accounts Receivable
If you have quite a few customers that still owe you money every month this is certainly going to contribute to less cash in the bank. It may be time to change up your billing process, such as creating new payment terms or requiring a deposit from certain customers. You should also have a system to consistently follow up on past-due invoices.
Operating Expenses
New and established business owners often time are not 100% sure what their monthly operating expenses are. This is because they are paying operating expenses from multiple accounts. Some are using business checking accounts, business credit cards, personal checking accounts, and personal credit cards. Paying expenses using non-business accounts or accounts that are not linked to your accounting system can cause your net operating income (profit or NOI) to be overstated because not all of your expenses are being captured on your Profit & Loss Statement. I encourage you to review your last three months of statements and update your billing information to reflect one account, to ensure you are able to properly account for your spending.
Owner Draws
You started your business to earn a living, so of course it’s expected that you’ll be pulling money out to support your lifestyle. However, problems can arise if your lifestyle is draining your business. It’s important to make sure your personal finances are also in order, and that you’re only pulling out what you truly need to live on. It is also a good idea to have a plan for taking money out – create a payment schedule and set amounts, more like a true salary. This will help with your personal budget and forecast your business cash flow accurately. Depending on your business structure, it may also make more sense to put yourself on payroll.
Debt
Taking on debt can certainly add to your cash in the bank but repaying debt will reduce it. If you’ve had to pay back loans that could be a perfect explanation of why your cash flow is tight. Debt can be a great way to increase your working capital, but you need to pay attention to the repayment schedule, and how that’s going to affect your cash flow going forward. Debt is not always bad, it’s just important to take on the right debt at the right time.
Remember, It’s not what you make (profit) that matters, it’s what you keep (cash).
Making sure you have enough cash in the bank to cover not only your expenses but these things I’ve mentioned above will set you on the right path to a growing and more profitable business.
Need help understanding why cash is more important than profit in your business? Schedule a 45-minute call today!
Hey! I’m Natasha, Profit Strategist & CFO
I’m truly passionate about helping business owners grow their businesses, which in turn helps grow their lives. I believe becoming successful is the highest form of resilience and interruption to society as we know it!
My passion, I would even venture to say, is my calling is to help clients go from feeling overwhelmed, stressed about cash, wondering "where did all the money go" to running their business like a CEO!
Got questions? Email us at hi@theprofitstrategist.co
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