By Brian Strump, Certified Two-Brain Fitness Business Mentor
What are the three most important words in business? Surprise! They are “profit” and “cash flow.”
Profit is what’s left over after all expenses are deducted from revenue. It’s the number from which taxes are calculated.
Cash flow is the money that comes into and goes out of a business.
Both are important yet often misunderstood by entrepreneurs.
You can manipulate expenses to influence your profit. However, it’s much more difficult to manipulate your cash flow. You either have the money or you don’t, and when you don’t have the money, the business will feel the financial strain.
You just can’t pay your bills with hard assets or accounts receivable. Whether it’s operating expenses such as payroll or utility bills or other debt, you have to pay in cash. If you’re too quick to spend your free cash on products to sell or assets for growth, or if you’re too quick to allocate it as income for the owners, you might find yourself unable to pay your bills.
It’s important for a business to have a solid understanding of where cash is going every month to reduce wasteful spending. It’s also critical to look for ways to reduce expenses in general to help improve cash flow.
The long-term health of your business depends on cash flow. The number one reason why businesses fail: They run out of cash. This occurs in businesses that struggle to create revenue, but it’s also a trap that can snare businesses with explosive revenue growth. Often a business that grows and expands too rapidly can find itself short on cash when it’s time to pay debts. Growth of your business is important—but not at the expense of security.
Some additional reasons why strong cash flow is important:
1. It provides the business with greater potential growth opportunities. You can expand your current business, start another business or bring on additional employees.
2. It provides a buffer against slow times.
3. It protects business relationships with suppliers because you pay off debts in a timely manner.
Cash flow and profit are the two main reasons why I don’t like seeing gurus tout “seven-figure businesses” as the goal. Believe it or not, there are plenty of $1 million businesses that are actually losing money. And there are many six-figure businesses that have exemplary profit margins and cash flow.
Start paying more attention to your cash flow and profit instead of your client count or gross revenue. If you do, you’ll create a more stable business.