Cash Flow–The Bottom Line

In the 1986 move Jerry Maguire, there is a famous line, “Show me the money.” Actually, when ever I read or hear about how profitable a business is, that line comes back to me.

Cash or Profits?

While there are any number reasons a company may fail, one of the most common is falling short of cash – that is insufficient positive cash flow. In fact, on paper some companies are very profitable yet they still fail. On the other side of this same coin, some companies remain unprofitable for an extended time and still survive because they possessed adequate cash flow. Of course, let’s be realistic here – a company cannot continue forever being unprofitable. But, profit alone is not enough.

What’s the Difference?

In a previous post, Cash Management –It’s Not About the Cash Account, I discussed some of the things that impact cash levels. Obviously, being profitable can help improve cash flow, but it is not enough. So it is important to consider profits and cash both together and separately. For example, while profitability can impact cash, things such as capital expenditures, accounts receivable, and inventory may actually have more immediate impact. See also, 3 Low Cost Sources of Cash – Part 13 Low Cost Sources of Cash – Part 2 , and  3 Low Cost Sources of Cash – Part 3 for more discussion on these. The point here is not to confuse cash flow and profits. Profit is what is left when we subtract cost of sales, operating expenses, and other expenses from sales. Cash is what we have collected of those sales, less what we have paid out to meet obligations for cost of sales, operating expenses, and other expenses.

Manage to Prosper

If you want to have sufficient cash on hand, it is imperative that you be concerned with more than just whether your income statement shows you are making a profit. You must manage your accounts receivable (uncollected sales are worse that no sales as you are out the cost of the sales as well as the sale), inventory balances (excess inventory leaves you with less flexibility), and operating expenses (obviously we don’t really need everything we want and it pays to look for bargains and even buy used) (See the blog Think Used). Just managing these three items can help you turn profit into cash flow.

What are you doing at your company to be sure you have adequate cash flow? Be sure your CFO, Controller, or Part-time CFO or Controller is watching this closely. It matters, really!

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.


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