Without Cash it Dies
As the old saying "cash is king" implies, without cash everything else stops or dies. If you ever find your business in a cash deficit situation you will understand exactly what we discussed in this episode. Join Ken "Mr. Biz" Wentworth and I as we discuss the vital need for an understanding of cash flow in a business.
Profit is not Cash
'But my business is profitable!' says the owner who is missing payroll for the first time. I have heard this many times in working with business owners. I had a business owner call me one time and show me his P&L (Profit and Loss) Statement with over a hundred thousand dollars on the bottom line. His question was 'Where is it? It certainly isn't in my bank account." As troubling as this can seem, it is all too real. Actual cash on hand and profits are two different things.
There are many reasons behind this. A few of the common issues are:
1. Accounting methods - accrual vs. cash basis
2. Terms on payables and receivables
3. Timing of transactions.
The key is understanding that while profitable, you may still be in a cash deficit. This is really important, especially for new business owners, to understand. You must know what your cash status is at any given moment.
How to Know Your Cash Position
The first place to start is with a basic level of understanding terminologies. What is a P&L and what does it tell you? What is a Balance Sheet and what does it tell you? What does a cash flow statement tell me? These are basic questions every business owner needs to understand.
Profit and Loss Statement or Income Statement - this simply shows the business revenue and expenses over a given period of time. This tells you if you are profitable.
Balance Sheet - this shows the assets, liabilities and capital of a company at any given point and time.
Statement of Cash Flows - this shows the inflows of cash and outflows of cash along with the impacts for a given period.
Understanding these documents will provide some insight into the financial health of the business and it s good starting place for understanding the cash position.
A Better View
In our Business Owner Freedom System we have developed for Small Businesses, we prescribe the Profit First method. This is a simple account based system that a business can use to know their cash position on an on-going basis. We have found this view of cash is much more proactive and accurate than anything else we have seen. This comes from the book Profit First by Mike Michalowicz.
How to Increase Cash
If you find your business cash position lacking, there are several things discussed in this episode that can positively make an impact.
1. Extending Payable timing - through business credit cards and other means.
2. Increase your pricing.
3. How to speed up your receivables through terms and other methods.
4. Leasing vs. Owning.
5. Lines of Credit.
The bottom line (pun intended) here is to focus on increasing your cash on hand and your cash flow. It will help you sleep better at night and ensure your business can continue on its mission.
If we can help you in any way reach out to us at https://BusinessOwnerFreedom.com.
Enjoy the Journey!
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