Imagine your business is a car. In this scenario, cash isn't just the fuel; it's what keeps the engine running smoothly, allowing you to navigate through traffic, accelerate when needed, and reach your destination safely. The saying, "Revenue is vanity; profit is sanity; but cash is king," perfectly fits here.

The Puzzle of Profit vs. Cash in Hand

You might think, "If sales are high, why do I feel like I'm always low on cash?" Let's look at the concept of profit vs. cash flow.

1. Waiting for a Payday
   Imagine you've completed a big job and handed the product to your customer. He’s thrilled with it, but says he will pay you for it in two months. It's like lending your friend money. Until they pay you back, you might have to tighten your belt a bit. That's how accounts receivable works. You've made a sale (which is great!), but you're still waiting for the cash to arrive. Review your accounts receivable process and credit terms to ensure they align with your business cash cycle. Then you can make the necessary adjustments like implementing milestone payments or adjusting the payment terms. 

2. The Storage Room Dilemma
   Think of inventory like items in your storage room. You've filled the room with things you plan to sell at a garage sale. But until those items sell, they are just sitting there, not making you any money. The trick is to have enough to sell but not so much that your money is tied up in stuff that's gathering dust. To optimize your inventory, track sales data and customer preferences then adjust your orders accordingly.

3. Big Purchases
   Now, consider you want to upgrade your car (your business) with a new set of tires (a piece of equipment) to increase efficiency and get to destinations faster. You are making an investment for the future, but it means spending a chunk of your cash right now. This is a capital expenditure. They are great for the long run but can make your wallet feel a lot lighter today. Prepare a comprehensive budget for your capital expenses and consider financing large projects.

4. Keeping the Lights On
   Every day, you must spend money to keep your car running smoothly. Fuel, maintenance, and insurance represent the operating costs akin to those of your business. It is important to manage these costs carefully, so you don't wind up spending more on the car's upkeep than you have in your bank account. Prepare and review an operating expense budget monthly, ideally comparing your actual spending to your budget to highlight unexpected items for investigation.

Navigating the Road Ahead

Managing your business's cash flow is like planning a road trip. You need to:

• Make sure there's enough fuel in the tank (cash in the bank).

• Plan your route so you don't run out of gas between stations (know when money will come in and go out).

• Keep the car in good condition without spending all your money at once on upgrades (balance big purchases with daily expenses).

Remember, cash is the engine oil, the fuel, and the very essence that keeps your business running. It's not just about looking good parked in the driveway (revenue) or having a powerful engine (profit). It's about having enough fuel in the tank to take you where you want to go (cash flow).

If you would like help analyzing and improving your cash flow, email me at joe@accountsense.cpa.

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Joe Silvera, MBA, CMA, serves as an outsourced chief financial officer and strategic advisor for small and mid-sized businesses. With a focus on personalized solutions, he helps business owners make smart, informed decisions through financial analysis, budgeting, managing cash flow, and much more.