What Is More Important - Cashflow or Profits?
"The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction and cash flow is a reality" - Chris Chocola
Running our businesses is like running a marathon, always on the move, pushing through the heights of challenges, tending to keep it bringing in the money and spending much of our energy to keep the momentum high. If I was to ask how you measure your success of the business, I am sure most business owners would tell me it is all about how much profits you can make in a financial year. Tell me I am wrong here... Quite understandably, profits raised marks a sign of success, allows more dollars in your pockets and room to innovate the business. But what if I told you that profits are just a theoretical time in history. It is after the fact.
Could you tell me where your profits have gone once discovered you are in profit? Questions equally important to ask yourself are: 'How many business owners can actually read their own score board?'
'Do you know what the information on the balance sheet says?'
'What does the profit and loss statement really mean?'
'How much cash flow is available now that is not already put aside to other fixed costs?'
"We have to learn to speak the language and know what it means. It is our scoreboard and we need to know if we are winning or not. If we could keep our net worth as we had 10+ years ago, we'd be happy as a pig in mud. We understand that there is a different way of managing to keep your business compared to growing your business."We know that the majority of small businesses fail within the first five years, but a recent study by U.S. Bank drilled down into the reasons why this occurs. In their study, they found that 82% of the time, poor cash flow management or poor understanding of cash flow contributes to the failure of a small business." Mar 8, 2018" -https://www.preferredcfo.com/cash-flow-reason-small-businesses-fail/
Cash Flow: The Reason 82% of Small Businesses Fail | Preferred CFO
As you can see, operating cash is pretty high on the list to remaining healthy in your industry. Profits are equally important to a long term view to be sustainable. Business owners are well aware of the economic tides that go up and down and markets will change our focus from how to profit? to how to keep cash flowing in?
Understanding the numbers and where you sit in your market will allow you to anticipate your move. 82% of businesses fail due to running out of cash flow. This is the blood flow of your 'things and stuff' (according to Rich Dad Keith Cunningham) that we need to keep it operating. It pays your employees, your drawings, buys your goods to sell, it keeps you trading from a premise, it keeps fuel in your cars so you can attend to your clients and so forth. Cash flow does not necessarily have to be derived from your revenue, it can also be funded from loans, but loans are given only if the numbers are supportive in paying it back. Catch-22...
Cash flow is pretty dam important to being sustainable. Profits will come when we have the cash flow to take advantage of opportunities that the market will present as actioned upon. In summary, we need to spare time and sit with our accountants to truly understand our scorecard - that is what the balance sheet says, the profit and loss statement and the cash flow statement mean at any time to anticipate our next move.
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Meg Hogan x
Meg Hogan is an Amazon #1 Best Selling author in Australia and US for 'Get Rich Be The Voice' and a Business Coach helping owners maximise their business potential to be in the best possible position to reap more revenue and retain more personal wealth. With her 100% money-back guarantee of satisfaction, she gives certainty to her clients that their best interests are at heart. "My door is open or anyone who may wish to discuss their business challenges in hopes of finding some practical solutions. Book a free call to chat on what I can offer you, and walk away with at least 3 things you can do now to improve your situation."
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