Financial Strategy

Making a Profit But Have No Cash?

Published by George Jensen

Making a Profit But Have No Cash?

Do you get frustrated when you see your monthly or quarterly P&L reports?

You show a profit but your bank balance says differently.

Are you scrambling to make payroll every week or every two weeks?

Do you have to stretch out paying your vendors longer than the terms they give you?

How can it be that the business is making a profit, but you have no cash?

Many business owners have a misconception that profits and cash flow are the same thing. They are not.

  • Profit is the result of revenues (sales) minus expenses
  • Cash flow is money going in and out of your business. Positive cash flow is more cash is coming in than going out. Negative cash flow means your business needs to spend more than it has coming in. Many times not having money coming in has more to do with collecting than selling.

For a business to succeed, it must generate profits but also operate with positive cash flow. For a business to be viable, cash flow is king.

A study by U.S. Bank found that 82% of the time, poor cash flow is the reason small businesses fail.

So having a high profit is great. But low cash flow results in a profitable business unable to pay its bills.

There is a solution. Let’s look at a couple of areas of your business where you may be able to find a solution.

Your Accounts Receivables

To find where there is a disconnect between your sales and your cash flow, the first thing to look at are your receivables.

  • Are your accounts receivables higher than your accounts payable?  If so, that is a positive.
  • Do you offer terms with your receivables that are longer than the terms your vendors give you to pay your payables?  If so, that is a problem.
  • Do you offer an incentive to your customers, like a discount, if they pay in 10 days rather than 30 to 60 days?
  • Do your vendors offer you a discount if you pay in 10 days instead of the normal 30 to 60 day terms?
  • What percentage of your receivables are over 90 days?
  • What percentage of your receivables do you ultimately have to write off?
  • What kind of due diligence do you do when you extend credit to a customer?

Giving a customer terms to pay your invoice is no different than your bank giving you a short term loan. Consider the following:

  • Do you have the owner of the business personally guaranty your receivable?
  • Do you charge a late charge or interest on the past due balance beyond your terms?
  • Is your receivable unsecured or is there underlying collateral that you can file a UCC financing statement on as a secured party until your receivable is paid in full?

To remedy cash flow issues, you need to get control of your receivables and ensure you have money coming in on time from your customers.

Your Lending Relationship

Do you have a Line of Credit at your bank?  If so, is it adequate to finance the amounts of sales and receivables you generate each month?  If not, it is time to sit down and renegotiate your Line of Credit.

If you have no Line of Credit to finance your receivables, then the first priority is to make an appointment with a lender to explore the options to meet your needs.

That leads to the question, “Is your financial reporting up to date and in order?”

When seeking a Line of Credit, you need to be prepared before you approach any lender. They want to see up-to-date tax returns on the company, internal balance sheet and income statements since your last tax return.

  • Do you have enough collateral to support your request for the amount you are looking for?
  • How is the owner’s personal credit?

Lenders are mainly concerned with your ability to pay them back.  Your lender should be looked at as one of your most valuable strategic partners in your business.  Without them, it could mean the difference of growing or staying stagnant.  It could also mean the difference between staying in business and going out of business.

Your Employees

Your employees are probably your company’s most valuable asset. Without them, you will not survive.  In order to retain them, they need to be paid timely and provided incentives to stay working for you.

Unless you are a one-person business, this should be your first concern.

  • If cash flow is tight, how long can you pay your employees and not take a paycheck yourself?
  • As the owner, if you loan the company money personally, how long before you run out of money?

Poor cash flow can cause you to make bad personnel decisions. You may hesitate to hire needed resources causing customer service issues. Or you may keep a bad employee because you don’t want to go through the expense of a new hire.

Remember This

Profits do not keep a company in business. Cash flow does.

Your business will not survive if you cannot manage your company’s cash. Small-to-medium businesses are at highest risk due to constantly re-investing profits back into the business either in marketing or inventory.

If your business is having cash flow issues, you may need help. Achieving positive cash flow for your business may take a more comprehensive assessment of your company’s financial health.