Profit Means Nothing!
What is more beneficial – a profitable business or a cash cow? The one is definitely not the same as the other! Just look at Steinhoff and the millions of ’Profitable’ businesses that have collapsed.
It is upsetting to say the least when one hears businessmen and women brag about their profits. It is the cash position of the business that counts! Profits can be easily manipulated but cash reserves never can! The business graveyard is full of profitable businesses that have collapsed simply because they ran out of cash.
Why is this? Because the guardians of the business are watching a different ball game to the one being played right in front of their eyes. “Oh … I watch my cash position – my bookkeeper gives me my reconciled bank balance every day” is the typical, universal, response of any business guardian whose business is, or very soon will be, immobilised in the mire of cash flow difficulties. How people like to deceive themselves!
So, what should you be doing? Manage your business on a cash flow basis! It is the business guardian’s responsibility to review the true cash position for today, tomorrow, next week, next month and up to one year ahead … daily. You will easily identify the cash holes and you will not be tempted to spend the cash when you hit the peak of the curve. At the very least, you will be aware of the problems and pitfalls and have a good chance to take remedial action!
The model one builds for this is simple, but sadly, few people seem to be able to grasp the concept. We are not going to discuss the mechanics with you in this post, you are invited to contact us for more information.
What we do want to give you is an amazingly simple formula, which will focus your fundamental thinking on managing the business on a ‘cash flow’ basis.
The object of a business is to make money – right? So, what then is money?
Money is Cash!
What is cash?
Cash = Sales – Operational Expenses – Inventory
Where:
- Operational Expenses are ALL the expenses in the business (depreciation is not an expense). These expenses incorporate your fixed, semi-variable and variable expenses i.e. things that cause money to flow out of your business.
- Inventory is ANY DEAD MONEY. Physical stock on hand is part of inventory, but so are debtors and underutilised plant, work in progress and those plans you have for the future (always difficult to quantify). Dead money is cash that has become a clot in your business.
Every opportunity must be taken to reduce production expenses and turn dead money into cash.
This equation can be applied to any situation in the business to see whether that staff member, product, customer, activity, decision and so forth results in cash contribution or a cash drainage.
Is the difference between profits and cash a bit clearer?
Remember that internal misjudgements are six times more likely to cause business failure than external factors. The message is clear … keep objective help close at hand at all times, and if you do not have it, get it without delay.
Month by month DL Garz Accounting posts another lesson, another principle or another business fundamental learnt from our experience and the expertise of more senior associates in business.
The success of your business is all about you!
QUOTATION:
Remember: you aren’t responsible for the misfortunes in your life, but you are responsible for doing something about them.
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