Herman School of Business
Cash flow isn't profit.
Many owners make this simple yet costly mistake. They use the cash flow in their account as if it is all profit. If they have no bills in their in-box and cash left over at the end of the month…hmmm…”it must be my profit” and they start spending it as if it were. Not so fast Manny Materialistic!
Just because there is an extra four thousand dollars sitting in the account and no bills in the box does not mean you have made a nickel, let alone a lot of nickels. Making it even worse, the next month the same thing happens and you now have eight thousand dollars sitting there. Eureeka…you can get that new whatever now right! Hold on Stanley Shortsighted. It’s not your money yet.
Month three goes by and you think your company has hit the mother load…this month the account has gone up by another five thousand dollars and you now have thirteen thousand extra lovely dollars. You start looking at new equipment to make your operation more efficient, a key worker just hit you for a raise and since you see that cash sitting there you generously give him/her a bump in pay. You stop by and purchase your spouse a little something special because you just keep grinning about those bucks in the bank.
Month four reality comes home to roost. Sales have dipped a little, but not your expenses. And the quarterly tax bill just got here. Your annual health insurance premium is due. As well as your once a year life insurance payment. Property taxes fell in this month too. Hell, what happened? Where did all this stuff come from? Cash flow is not consistent. Bills do not come in daily for that days cost. Annual payments in a soft quarter or month can cause quite a pinch. This is why I preach that you have to KNOW MATH OR NO MONEY. While it may seem obvious to you reading this example of cash flow issues here, I have seen countless owners spend money just because there seems to be more in the bank at times than you need that month.
Sales are inconsistent, and not always on the rise. A key piece of equipment is about to break down, just when you want to buy that new trinket for yourself. Cash management in business is a necessary skill to stay on the path of success. Put away for annual expenses. Stay ahead on whatever bills you can pay ahead. The peace of mind from not having money worries in the next short month was better than any trinket I ever bought.
- Posted: 12 October 2007
- Comments: 2
- Category: Business success
Comments
Money management is essential, but how far do you take it? You can pay your rent, health insurance, wages, and so on for a year in advance. When are you comfortable taking money? It’s all sales dependent all the time and you are never very certain, especially in the first or second year of your business, that sales won’t fall off a cliff. Are there guidelines you use?
Herman says: I do believe in paying yourself living expenses. And also allow for an occasional treat above and beyond. But cash management is critical at all times...until you have three to four months of reserve for the basics...only then can you loosen up the purse strings if staying in the game long term is the objective. Investing any excess money in the business is usually the best thing you can do to treat yourself.Written by BillOGoods on 15 October 2007
You knew me before I did. Two questions:
1) What are some resources to learn the difference between Cash Flow and Profit? Not just textbook learning, real learning.
Herman says: I will do some research for an answer to this question...but read both THE INNKEEPER TALES and HERMANISMS for several real life examples.2) After attempting miracle shots to get back on course—to borrow a Hermanism—after a few month fours, how does one put it all back together? If not how, then when is it too late?
Herman says: An earlier Blog posting talked about a formula for when it is too late. Briefly...if real profits even doubled in the next two years and you would still be under water...you have already gone too far...and by the way...profits are very seldom double what you expect.Written by "Stanley Shortsighted" on 13 October 2007