What's the Difference? I once bought a business from a gentleman who was looking to retire. I'll never forget him telling me, "Wally, years ago, things were different running a business. Back then, we wore shirts with two pockets. We kept our money in our right pocket and our bills in the left. I always figured that as long as my right pocket was bigger than the left, we were doing alright." How simple that sounds, but also how true it just might be!
I found that what a lot of small business owners don't understand is that there is a big difference between Profit & Loss and Cash Flow. Unfortunately, I've seen many profitable companies go out of business because they simply ran out of cash. If your partner came to you and said, "I don't understand, last month we had over $10,000 in the bank and we made $6,000 this month, but the bank says our account is overdrawn," would you be able to explain why?
You see, many things could possibly affect the cash flow of your business; accounts receivable, accounts payable, inventory, capital expenses, etc. For instance, if you've sold something and haven't been paid yet, you may still show that as a profit, but it would definitely affect your cash in a negative way. On the other hand, if you've sold something for which you haven't yet paid for, that might affect your cash in a different way. Many business owners often forget about inventory. The inventory that you purchased has value. However if you paid for that inventory and it's still sitting there, do you see what it does to your available cash? The same holds true for capital expenses as well; items like office furniture, equipment and vehicles. Most of the time those items will be put on your balance sheet and be depreciated over time, so it won't immediately affect your P&L, but it sure does a number on your cash flow.
The point is, DON'T RUN OUT OF CASH! Planning your cash flow is a must for any business owner. Take a look at when your slow and busy times are and prepare in advance. If you don't have deep pockets or a coffee can with large bills buried in the back yard, set up a Line of Credit with your bank, so that you can draw on it as needed. (Oh, and by the way, don't wait until you need the cash to get this done).
Don't let your profitable business become a cash flow fatality. Keep what's in that right shirt pocket larger than what is in your left.
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