Make Profit Count

Ever wondered why a company that seemed to be doing so well suddenly failed? Often times the reason is that management took their eyes of the ball, with the ball being defined as cash. I touched on this earlier in Cash Flow – The Bottom Line. Basically the issue comes down to realizing that in order to make profit count it is essential that profit is converted to cash.

Cash is Critical

Without adequate cash a company will be hard-pressed to pay bills. I’ve had clients and been an employee of companies that were very profitable on paper. But, that’s on paper only. If you looked only at their income statement you would have thought they were doing just fine. On the other hand, if you looked at their balance sheet you might get a different picture. I say might because in order to understand just what the balance sheet is telling you requires some analysis to determine such things as:

These are just a few things, but they tell you a great deal about how financially sound a company is. But there is another statement you also need to consider.

Statement of Cash Flows

In the posting Understanding the Statement of Cash Flows I gave a brief overview of the statement of cash flows and how to interpret it. I won’t revisit that, but I do want to point out that this statement also tells you a lot about whether a company is able to make profit count because it identifies not only the uses of cash but the sources of cash. If the sources of cash are largely things like more credit and the uses are largely to finance past due accounts receivable and excessive inventory, then you may well be looking at a company that is in danger of failing.

Left unaddressed, a company like this could be one that surprises many with what seems to be a sudden collapse. However, in all likelihood it was something that took time to develop and is something that management could likely have avoided with a little preventive action to make profit count.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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