<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=275610486160139&amp;ev=PageView&amp;noscript=1">
CLIENT LOGIN
802.846.1264
South Burlington, VT

Value Creation Blog

Profits Are Not Cash - Cash Flow

Posted by Josh Patrick

empty-pockets-1I learned the hard way that profits don’t equal cash. When I first started in the vending business I was all of 24 years old. The first few years were great. We added a ton of business and our profits were strong.

I thought I had figured it all out. Then, as often happens when you own a business, the Universe thought it had a better idea for me. I learned that profits and cash are two very different things.

Standard accounting reports are not for you.

If you looked at my profit and loss statement in 1978, you would have been very impressed. That is unless you happened to also look at my cash flow statement. Then, you would have been appalled.

You see, I was making a ton of money. We were growing at over 20% per year for three years in a row. In fact, in one of those years we grew way faster than that.

I looked at my monthly statements and started spending all of that extra money in my mind. Then the calls started. First it was a trickle and then they just exploded. It seemed happen all at once. If I couldn’t come up with a lot of money quickly my suppliers were going cut me off.

How could this happen?

I was confused. How could this happen? After all, I was making lots of money or so I thought.

It was really pretty simple. My profit and loss statement didn’t tell the whole story. Since we were adding lots of business I had to buy lots of vending machines. The cost of these machines didn’t show up on my profit statement. As a result, I was out of cash and if I didn’t find a way to borrow a fair amount of money, I could be out of business.

Buying capital equipment is not an expense.

I learned there are three things that can eat a lot of cash and will never show up on your profit and loss statement. The three things are:

1. Capital equipment purchases.

2. Increase in accounts receivable.

3. Increase in inventory.

I had hit two out of three. Our inventory was significantly higher and we were spending several hundred thousand dollars per year on new equipment. This almost put me out of business. Don’t let the same happen to you.

Your most important statement

I learned the real statement I needed to pay attention to was the one called statement of changes in financial position, otherwise known as a cash flow statement.

This is the one that showed where our cash was going and what it was being used for. It showed what happened when I borrowed money and what happened to our profits. After I learned about this statement, I stopped dreaming about what I was going to buy and started getting our house in order.

In a small business it’s always about the cash.

It’s really pretty simple. If you run out of cash, you have to stop playing the game. Don’t run out of cash. Learn how to read a cash flow statement. Better yet, put some systems in place that helps you monitor your cash weekly. Don’t repeat my lesson. It hurts way too much.

There are lots of things that can add or subtract value from your company. We’ve got a short eighteen question survey that can help you pinpoint strong and weak areas in your company. We call this our CoreValue report. To gets yours, click on the button below.

Core Value Report

Topics: profitability, business coaching, Cash Flow

Subscribe to Our Blog

Subscribe to Our Blog

Most Recent