There is a tendency for you to expect that if you are profitable you will be automatically cash rich. But it does not work that way. This is because cash is a result of your profit, but also a result of your working capital, as well as your other assets. We have written a book about this already – How to double your cash flow overnight.
In this blog we will highlight how cash differs from profit and what is more important to your business. This will set the foundation of your understanding for the importance of cash flow to your business. The greater your understanding, the smarter the actions for doubling your cash flow.
Think about the movies when they are trying to find a criminal who is on the run. What’s the first thing they do? They try to understand as much as they can about the bad guy. So think of your cash flow as the bad guy, you want to succeed in getting it!
What is the difference between cash and profit?
Profit is your leading indicator, and cash flow is your lagging indicator. Cash flow happens after your profit and sometimes it does not happen at all. You also need to use cash before you generate profits.
What is more important, cash or profit?
If you are growing business, cash is more valuable to you – you need cash to fuel your growth. That’s why so many growing companies are breaking even, or even making losses, but concentrate on generating more cash. Amazon, for example, has a business model that produces significant amounts of cash despite breaking even, so it can continue to expand rapidly.
Cash issues grow as you scale up your business. Understanding the importance of cash will help you determine what business model is suitable for achieving your business goals. Understanding cash will also help you uncover blind spots in your business masked by your growing profitability. You might be outgrowing your ability to fund your business because you did not understand the importance of cash. Find out if your cash flow is inadequate with our Cash flow Performance Tool for CEOs of growing businesses. If you are in such situation, you will continue to raise emotional money to fund downward spiraling growth and money people will always take advantage of you.
It is important to understand your business from the perspective of financial experts and investors, otherwise you will always be frustrated with their lack of understanding of your business. They are interested in your creditworthiness and this is their motivation for entering into a dialogue with you in the first place. They are looking for a return on their money.
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