Many business owners tell me they are making money, but they have no cash in their accounts to work with. Too often business owners look at the net income (profit) on the bottom of their P&L and think they are making money and have cash in their business. Reality says otherwise.
Remember that profit is simply the amount that your revenue exceeds your expenses; it is not cash but the theory of cash since your P&L does not take into account debt service, owner draws, or disbursements. Your interest payments on debt are accounted for on your P&L but not your principal payments. Here’s what it looks like in a formula:
REVENUE – EXPENSES = PROFIT
You cannot spend the theory of cash, and profits are not cash. It does not matter how much profit you make if the amount of cash you receive is less than or equal to what you are spending.
As mentioned in my last post, cash is not the king, it is the ace. You need it to grow your business. When you operate as if net income or profit is cash, you run into trouble. Always remember that profit is only the theory of cash.
If you would like to better understand how cash moves in and out of your business and how to improve top-line revenue and bottom-line profit, give us a call. We are experts in business. Your first hour is free. 503-312-3145
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