Cash Flow Vs Profit

Too many small business owners spend money because they have a positive bank balance or because they think they have a positive bank balance. This can be a very dangerous practice to the health of their business.

When a business makes a big sale or gets a large upfront deposit on a new order the owner of the business may begin to spend the money to pay various bills, take the spouse out to an expensive restaurant or even buy a new boat. The owner first needs to know how much "free" cash he / she really has available to spend, before it is spent. If you are a contractor of some kind, you may need that money to buy materials for that particular job or to make payroll on that job. Just because cash is there does not mean it can be spent without a plan.

Every business needs to have some kind of "cash needs" analysis to know what is due, when it is due and how much is due. An employee may see a large check come in and think, "well, the owner has a lot of money, I am going to ask for a raise." The employee may not realize that the job is only a break even job and all of the available funds will go to pay labor, materials and overhead on the job. There will be no profit on this certain job. Many do not realize that things like insurance, rent, utilities, etc. need to be paid every month.

Several years ago there was a contractor who received a large deposit on a job. Because he had so much money in his bank account he made a few purchasing decisions that cost him his business. He sent some of the job deposit on, yes you guessed it, a new boat. But it was only a down payment. He later lost the boat to repossession, the job was never completed and he later lost his whole business.

All business owners need to find a workable system that will help them know what to pay, when it is due and how much is due, so they will have an accurate accounting for their cash. As a wise person once said, "cash is king". That is still a truism today. Be very careful with your "free" cash. It may mean the difference between survival and the alternative. Good luck with your business!



Source by Randal Roberts

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