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Value Creation Blog

Profits Are Nice – Cash Is Better

Posted by Josh Patrick

check register 1 resized 600I want to tell you a story.  It was 1979.  I was flying high.  My company had just completed the best year it ever had.  We made a ton of money, or so I thought.

Then I looked at the checkbook.  Instead of having a big fat balance that our profits showed, I was looking at a six figure negative balance.  At first I thought it was mistake.  How could it happen?  Here I was making a ton of money, and at the same time I had no money.

Profits are not the same as cash

This is where I learned a very painful lesson.  Profits are not the same as cash.  Making money is important.  If you don’t have profits for a long period of time you can be sure you’re not going to have any cash.

How could it be that I was really profitable and have run out of cash?  The answer is in the rules of accounting.  It’s a lesson I learned and anyone with a fast growing business experiences: Growth is expensive.

In my case our growth cost was vending machines.

In 1978 we more than doubled the size of our business.  In most instances this would be great.  Unfortunately, I had to spend lots of money to buy vending machines to fund the growth we had.

The bank would only loan us so much money.  The rest we were going to have to come through our own cash flow.  If we grew at 10 or 20%, this would have been no problem.  We grew at almost 100%.  This caused a big problem.  I kept writing checks to cover our part of our growth and the checks I wrote outstripped our ability to create cash.

The lesson I learned

I learned an important and a painful lesson.  Profits are not the same as having cash.  Growth capital for things like equipment, inventory, or accounts receivable are not expenses when you create them.  I didn’t know this.  After all, I was an American History major.  They don’t teach accounting in History. 

I hadn’t learned the language of business.  I had an emergency and really didn’t know what to do.

Owning up to the problem

I eventually worked my way out of my cash flow crunch.  I went to the bank and explained the situation.  I called our suppliers and explained what was going on.  Neither conversation was a pleasant one.  Both our suppliers and the bank gave a little.  I lowered my salary and we managed to make it through. 

As Buckminster Fuller says, “You don’t learn less.”  In this case I definitely didn’t learn less.  This lesson taught me to first pay attention to cash and then crow about profits.

Learn the language of business.

The language of business isn’t accounting, it’s finance.  The problem I had was caused by the rules of accounting.  The real problem was finance.  I never planned for how I was going to finance our growth.  I just thought that growth was always good.  I never thought about where the money was going to come from.

If you’re going to be in business, you need to understand the language of business.  You need to know that it’s not profits that keep you going it’s cash.  Without cash the game is over.  It almost was for me.  Make sure it’s not for you.

If I had a good budgeting process I might not have run out of cash.  I invite you to download our special report on Four Tiered Budgeting.  This system helps you budget in a simplified way that would give you an early warning if you might run out of cash because of growth.  Believe me, it’s easy to do.  To get our report, click on the button below.

Click Here for your Special Report on Four Tiered Budgeting

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

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Topics: value creation, finances, lessons learned

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