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  • Christie Varner

PJS #010: Where's my Cash? I'm Profitable!

In today’s issue of Profit & Joy Simplified, I’m going to explain how your business may be profitable - but you still find yourself stressing over cash.

That just feels wrong, right? I mean, profit is the goal for a business.

Right. Kinda.

It’s possible for a business to be both profitable and have negative cash flow.

Your business may be growing & increasing in revenue, but still experience more cash outflows than inflows.

Profit isn't the same as Cash Flow

The P&L statement is how we often measure business success, but if we lose focus on cash…we could find ourselves out of business.

Let’s dive a little deeper into how this can happen:

Profit = Revenue - Expenses

but cash isn't accounted for in that equation ⬆

Cash isn't intended to be the same as profit. In fact, the statement of cash flows (standard financial report) reconciles cash to profit - because differences are expected!

3 Reasons that Profit & Cash Don’t Match

1. Timing

Sometimes a mismatch between cash & profit occurs due to the time gap between when you get paid (or have to pay) and when revenue (or expense) is recorded.

Revenue example

It’s common in many industries to perform services before receiving payment. Payment is often not due from a client for 30-60 days. This means you record revenue way before you've received payment.

But, if a client prepays you for work you’ll do later, you have cash but haven’t recognized revenue since you’ve not provided the service yet.

Expense example

A similar thing can happen with expenses if you prepay an expense that lasts over a period of time - like an annual insurance payment. This means you’ve spent cash before you’ve recognized the expense.

Or you can pay for something now, but don’t receive the service right away (eg paying for ads to run next month).

Note: While accrual basis accounting is a more accurate representation of the business’s health in general, cash basis accounting would show a more accurate reflection of a business’s cash in the bank.

2. Asset Purchases & Taking on Debt

Cash is sometimes used for purchases that don’t affect profit - like purchasing assets.

Examples of these asset purchases could be inventory, leasehold improvements, office furniture, vehicles, and many others.

But, if you took a loan or had some investor contributions, you’d have an increase in cash with no impact on profit.

These are balance sheet only transactions.

3. Debt & Equity Payments

When you make a debt payment or take distributions as investor owners, the business’s cash balance declines - but there’s no impact on profit. These too are balance sheet only transactions.

Should I Focus on Cash or Profit?

Although it’s now clear from just these few examples that profit & cash flow are not the same, both are important for a business to be successful in the long term.

So where should you focus first? Let’s use a simple analogy to answer this common question.

You can survive without food for 3 weeks.

You can survive without oxygen for 3 minutes.

Profit is food.

Cash is oxygen.

Yes, you want to run a profitable business. It’s an indication of how your business is doing over a period of time - a business report card.

But if you don’t have cash - to pay vendors, employees, taxes, etc - you don’t have a business.

Simple Fix to Cash Flow Woes

An Intuit study reports that 61% of small businesses struggle with cash flow. So if that’s you, you’re not alone.

Action Step: Start using a cash flow forecast system right away!

The FIRST area I focus on with clients is their cash situation - and making sure they have a cash flow forecast. A cash flow forecast is a pathway to your peace of mind as CEO.

Create a simple cash flow forecast:

Today’s cash balance

+ Cash expected to come in

- Cash expected to be paid out

= Expected ending cash balance

Your goal should be to project this out week by week for the next 13 weeks!

Don’t expect perfection. You get better with practice.

And the confidence you’ll feel from doing this? Priceless!


Profit isn’t the same as cash flow because…

  • Timing of when you get paid (or pay) & when you record revenue (expense)

  • Asset purchases & taking on debt

  • Loan & owner payments

  • Profit is food; Cash is oxygen

  • Create a cash flow forecast system

Bottom line - both profit & cash flow are important. It’s crucial for you as a small business owner to not only understand the difference between them, but to also strategically create steps to optimize both.

That’s all for today. Hope you found this useful!

See you again next week!

Whenever you're ready, here are 3 ways I can help you

1. Get help building a 12 week plan, cash flow forecast or understanding the levers affecting your profit here.

2. Want to chat about how I can help you achieve your vision of success? Schedule a call to see if we'd be a good fit to work together.

3. I post on LinkedIn every weekday at 7:15a CST. I'd love to connect. Find me here!

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