Picture yourself as a small business owner - how would you respond to these questions:
✅ Which measure is more important - profit or cash flow?
✅ How often do you review your Profit and Loss statement?
✅ How often do you review your Cash Flow statement?
Ideally, the business owner responds that profit and cash flow are critical measures I regularly review!
Profit: The accounting definition of profit is revenue less expenses, recorded at month-end. You can find profit (or net income) on the Profit and Loss statement.
Cash Flow: The spigot of money coming into the business and the drain of money going out. Cash flow is operational. Cash "in" includes product (or service) sales, loans, or stock issuances. Cash "out" includes operating expenses, loan repayments, inventory, or asset/equipment purchases. Cash flow looks at the Profit and Loss and Balance Sheet statements.
There is a misconception that my cash flow is favorable if my business is profitable.
The oops in this assertion are the timing of events and profit - mainly if the business operates on an accrual basis. And if using the accrual basis, profit includes non-cash items, e.g., depreciation expense.
The oops manifest in the tug between growth and maintaining a status quo. Cash is needed if the business seeks growth by adding new equipment or building inventory stocks. Cash is required upfront before (potential) revenue-generating sales activity. You can see the looming pain point if cash reserves are not readily available. Lack of inventory leads to reduced sales and profit. There could be a yo-yo effect of sales chasing cash in hopes of funding operations, debt interest, and growth. It is possible to show a profit and be cash-poor. Conversely, cash-rich and show a negative profit (loss).
Generating cash flows from day-to-day operations and controlling cash flow is the key to supporting future growth. Small, mid-market businesses must develop a consistent cycle forecasting profit and cash flow positions. Leadership must have the cash flow insight and thus resilience to unanticipated expenses and market opportunities.
Suggestion - adopt a rolling profit and loss plus balance sheet forecast cycle. And - forecast cash flow - understand your cash burn rate. Starting with your current cash balance - can you predict the cash in-s and out-s? Practice and repetition. A reasonable forecast goes a long way to ensuring your business - and your vision's - viability.