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Archive for the 'finance' Category

Understand Cash Flow, Profit & Equity

Saturday, December 7th, 2013

One of the consistent issues that I run across with struggling small business is a lack of appreciation for the importance of maintaining cash flow. If cash flow stops, or even falls below a manageable level, then you’re out of business regardless of any profitability or equity that’s involved.

Look at it this way. Your business is a separate human being (if it’s a company then it’s a separate legal human being) and cash runs through that human being’s veins. The daily trade pushes cash flow through the register (the heart) and out to the world (the senses). If the heart stops – if cash flow stops – that separate human being dies. If the blood pressure is too low then that human being will suffer and if it becomes chronic then it can slowly die.

You can love that separate human being all you want. You can dream that human being is going to grow and prosper. You can believe that human being deserves to exist. But if you can’t keep blood in the veins of that human being – that business – then it dies.

Cut away the metaphor for a minute and this is what you have: cash flow pays the bills as they fall due; cash flow feeds you and your family every single day; cash flow keeps the lights on. If you don’t have cash flow then the people and businesses you owe money will force you into receivership. You’re done.

At the same time, you need to understand your Break Even Point. At what point in your trade do you move from loss to profit. This is a key barometer to understand how you’re business is operating and to know when or how to adapt to the environment.

This is where the confusion arises. “Oh” they say “but I’m profitable.”

That’s actually a false God because you can be unprofitable forever as long as you can keep your lights on. You can be extremely profitable but not have the cash to pay your short term loan installment and you’re toast. Profitability is great… cash flow is essential.

Which brings us to equity – you own a share of the business assets.

Again, I draw the line back to cash flow and keeping the lights on. If you can’t pay your bills as they fall due then the receivers will be cashing your equity into their bank accounts. It’s that simple. You can’t own a business that ceases to exist. When the lights go out from lack of cash flow there will be a whole bunch of people coming for your equity and they’ll have steak knives sharpened with copies of The Idiots Guide to Getting Paid tucked under their flannelette pyjamas.

I’ve yet to see a single sandwich made with equity. Or, for that matter, profitability. The only thing your family eats and your business needs today and day after day is cash flow.

Jerry McGuire nailed it right there… Show me the money!

When I look at your business it’s always going to start with your cash flow.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark (aka nortypig) and I live in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a photographer making pictures with film. A web developer for money. A business consultant for fun. A journalist on paper. Dreams of owning the World. Idea champion. Paradox. Life partner to Megan.

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