atlasWhat’s the difference between cash flow and profit?

Everyone in business should read Ayn Rand’s Atlas Shrugged. With all the Anti-Wall Street and anti-business rhetoric you hear daily, one might be afraid to own up to their capitalist leanings. Admitting that we work for money symbolizes capitalism. Ayn Rand said “Money demands of you the highest virtues.” Unfortunately, the general message out there today is: Dollars are money, money symbolizes capitalism; capitalism is immoral. Don’t believe it. Making money demands our best. Having money or spending money is not the same thing. The question to ask: Are you making money? Let’s have a reality check.

It is our belief, based on our day-to-day dealings with dozens of southeastern companies, that money remains tight, especially for small businesses. Further, many companies really don’t understand why things are the way they are. We hear the following frustrations:

 

The key to the above is these are excuses. There are plenty of companies doing well in the face of all these obstacles. Some of our readers might need a primer on today’s subject matter, cash flow and profit. Many of our readers are not graduates of Ivey League business schools and haven’t had anyone sit down with them and explain the difference between the two.

Profit—the gain received on a business undertaking after costs have been met. This presupposes that we understand and take into account the true cost of being in business and attribute overhead to our costs. It is here that most businesses make a mistake by underestimating their costs. Worse, many businesses really don’t know their true cost of operation and therefore consistently underbid.

Cash flow—the movement of money received and spent: The pattern of income and expenses, and its consequences for how much money is available at a given time. In business cash flow may be the most important thing to know. If you have a positive cash flow (more money coming in than going out) you stay in business. If you have a negative cash flow, you will first deplete your available cash, and then go through any borrowings you might have access to. At the end there is only death. The death of your business, hopes, dreams and aspirations. Not a good thing to have happen. But, it need not be this way.

To keep the wolves at bay, you must first understand that what you think your problem is may not be the primary issue. We are amazed that marketing is usually the first expense cut instead of the last. Also, people and companies with negative cash flows wait until it is nearly impossible to do anything substantive while waiting for that mythical “big check” to come in or for that big piece of business to commence. Don’t wait. Instead, keep good books and spend a little money with your accountant (a good one) and ask that they independently look over your situation on a monthly basis, especially if you think financial statements are written in Greek.

Businesses can run for years on a positive cash flow while losing money month after month. This is a startling revelation for some people and hard to fathom. So, imagine there being a bubble over your company’s door. Into this bubble go your initial and subsequent investments, collections and deposits. Out of this bubble come your expenditures. The confusion occurs when revenues and expenditures are not matched, i.e. money coming in does not go for expenses incurred but rather goes to refilling the pot (bubble). Unfortunately, that’s the way businesses tend to operate, not knowing whether a particular job was profitable or not. No wonder it’s easy to get confused.

Even if you are not a cost accountant, all you really need to do is diligently look at your monthly financial statements. Like it or not, if your Income Statement shows you losing money two months in a row, take action! Bring your expenses down to be in line with your income. Sooner or later not making money (a profit) will catch up with you. Don’t depend strictly on cash flow. Good Selling!