Profits don’t always equal cash flow!
Do you ever find yourself asking this question: “ Even though my P&L statement from my accountant or controller shows that I am profitable on my sales, why am I always “cash-starved” every month? I struggle to keep enough cash on hand to meet my obligations, after paying the month’s operating expenses and covering debt payments I HAVE TO MAKE and still have a cash cushion on hand at the end of the month! MY PROFITS NEVER EQUAL MY CASH GENERATED !”
The main reason is that accounting P&L profitability does not often equal cash flow “profitability” or cash SUFFICIENCY.
Eg. The P&L “implies “ you should have enough cash generated monthly from those sales to meet all of your expenses and leave you with enough cash because you are PROFITABLE! The P&L “SAYS” you should have enough cash flow !
Cash does not always equal profits! So a business planning solution tip will be:
Build enough “cash buffer” every month by doing some cash planning to better align cash expenses with cash collections timing.
Give your business the cash buffer needed when the P&L sales aren’t giving you enough cash to cover your monthly out of pocket expenses and still have a “buffer” cash balance.
Have your accountant show you how much cash is collected every month from all the sales booked in that month AND how much cash is paid out for inventory you must build or buy and for all other expenses.
If you sell mostly on credit( which most businesses do) very little of the month’s “sales” shown on the P&L is actually cash collected.
And the “cost of goods sold” for the month on those P&L sales probably came from inventory materials and labor that has already been paid for before the month. Unless you build to order every month for sales and keep little or no inventory on hand. So the profits on those sales always look much higher than the cash flow!
Sure those sales show they are profitable on the P&L, but you don’t pay your bills from the P&L every month !! You pay them you’re your checking account, and your checking account is not your profit and loss statement!
You must still buy inventory and pay for it or for its materials and be manufacturing labor every month with cash, regardless of the month’s sales! Staff salaries, rent, electricity have to be paid, sales or no sales!
“Sales doesn’t always equal cash collected and monthly cost of sales does not equal cash paid out on the inventory used for those sales!
Buying and building inventory monthly is often the largest operating cash drain, that is not shown on the P&L.
You may not collect cash from the month’s sales for another 30 days or so ! And the monthly cash “costs” of those sales is often far more than the “cost of goods sold” shown on the P&L in any month.
Reduce inventories to maintain enough to support ongoing sales by eliminating all obsolete, slow or non-moving products. These products don’t turnover over enough and suck up a lot of your monthly cash to support them! Better inventory management can really improve your operating cash needs..
Try to increase your product gross margins; If you can’t raise prices easily(which is usually the case) then there are often cost cutting improvements in manufacturing costs or purchasing materials costs, that are overlooked, which can raise gross margins.
Remember, higher product gross margins and higher inventory turnovers of these products will often give you the “cash cushion” you need to comfortably meet all of your monthly cash obligations from your monthly sales.
especially critical if your company is a supplier in a supply chain selling lower margin products, with little or no ability to raise prices. Your cash operating margins are thin enough, so you MUST lower operating costs to improve gross margins and increase inventory turnover, matching inventory levels very closely with sales demand.
Look for and routinely make cost improvements in all areas of the business. Make this a standard operating practice in your business. Practice the “continuous improvement” philosophy. Most companies do not.
And that can be one of the biggest opportunities for cash flow savings that is often overlooked!
Author: Tom Stamatis
About the Author
Thomas Stamatis, Venture Advisory, DBA Strategic Planning & Financial Advisory
Tom Stamatis is a seasoned financial and business planning professional seeking to partner to help manage new companies and business opportunities. He has worked with both publicly traded and private companies, he has over 30 years of financial planning and financial management experience in a variety of consumer products, manufacturing, environmental technology and information technology firms.
Tom offers extensive business planning, manufacturing costs, operations and marketing/sales operations financial experience. Tom has demonstrated solid and seasoned proficiency in financial analysis, operations planning, cost-benefits analyses, feasibility studies, merger and acquisitions analysis, business operations strategy and business modeling. Personal characteristics include high integrity, diligence, attention to detail, providing personal leadership to secure results under high pressure and demanding business environments.