If Cash is King, What is Profit?
by Michelle Bomberger | May 6, 2019We all know that ‘cash is king’ but as business owners, it seems that we really should be focused on profit, right? Profit is what we get to reinvest back into growing our businesses or, better yet, take home. Last week, I attended the Profit Mastery program, which provided a fantastic and stark view of how sales, cash, and profit interplay with one another. And I learned the answer to one of the most confusing questions in business: Why is it that companies having their “best year ever” often struggle to make ends meet? We think the obvious answer to success is profit, but in reality — it’s cash.
Most business owners focus their scrutiny on the profit and loss statement — on what’s the top line and what’s the bottom line — mostly looking to ensure the top line number is greater than the bottom line number. Others just look at the soaring top line and figure there must be enough money to cover costs, but what’s is often overlooked is the additional costs needed to support that top line. These costs are often found in the amount of inventory and labor needed to support sales growth and the length of time receivables remain outstanding. All of these expenses tend to grow as sales grow and are often not factored into budgets. If they’re not carefully managed, cash required to support sales growth will be greater than your ability to collect it.
When this challenge does occur, you need a way to cover the cash deficiency. More money from the owners is one option. Banks are a more common choice, providing a line of credit to support the business’ cash needs. Bank loans can be an excellent tool for this purpose but as a business owner, you need to really understand the rights of the bank and the obligations of the business under the loan terms. Generally, the assets of the business are securing the bank’s position. If you default, the bank can call the loan and seize all your company’s assets. Sometimes the bank also requires a personal guarantee by the owner, where the owner’s assets also secure the bank’s position. It’s essential that your business can sustain the loan terms you agree to. Coming into the bank prepared with an understanding of your cash flow needs and realistic ability to repay will make your request more credible and will make your business stronger in the longer term. You’ll need your team to help you prep for this — your CFO, business attorney, and financial planner are resources that can help you think about what you need and put a plan together.
Yes, profit is a critical goal for all businesses but cash flow is an overlooked factor that is tied to sales in unexpected ways. It cannot be ignored but instead must be proactively managed to sustain sales growth and ultimately profit growth as well.