3 Reasons Why Cash Flow is More Important than Net Profit

I have been hearing a recurring theme from my customers when we review their Profit & Loss Statement, “Why isn’t my net profit how much I really make?”? I understand their frustration.? So here is what I tell them:

Breaking down the top 3 reasons:

1.??????Net Profit doesn’t include your monthly debt payments.??

When it comes to your loan payments, your interest expense should be on your P&L, but the principal payments are not.? Therefore, you need to account for the principal amounts and deduct them from your bottom line.? I find this to be burdensome, and suggest you establish a Net Profit Margin % that takes into account your debt payments, taxes, and owner’s compensation.??

2.??????You can have profits but no cash (sound familiar)?

My client Anna scratched her head in confusion as her bank balance didn't quite match her recent P&L report.

With over $200k in A/R waiting to get paid and bi-weekly payroll looming, Anna was stressed.

Despite showing a healthy net profit of $100k, only $10k had trickled into her account, and she was stumped about the $90k deficit. Anna was in a tricky spot.

She exclaimed, “What happened to the other $90K?? I didn’t take it as a salary!” ??

??Anna's service-based company was booming, but as is the case with most growing companies, it was gobbling up cash at an alarming rate.

Starting on a shoestring budget was impressive, but a lack of working capital was slowly taking its toll.

It's worth noting that many businesses go bankrupt not because they're unprofitable, but because they just run out of cash.

??But fear not! We've got Anna's back.

Our plan? Improving her working capital by securing a bank loan. ??

??TIP: As a rule of thumb, you should have Working Capital (cash + line of credit) equal to 10% of your annual revenue. Cash is the fuel for growth, but owners shouldn’t be the last ones to be paid.

3.??????Your true salary is Cash Flow available to owners, not Net Profit.

Your Net Profit and Bank Balance will never match perfectly.? This is due to a variety of factors (some mentioned above).? This is why I teach my clients to build a Financial Forecast (Budget) and set parameters around key margins to include:

• Cost of Goods Sold (COGS)
• Gross Profit Margin (GPM)
• Salaries
• Net Profit Margin

The problem is that most people are working with dollars instead of percentages.? By working through this process and establishing your Net Profit Margin, it will take into account exactly how much you need to make to pay yourself competitively.??

And then there’s “hidden cash flow”...

Furthermore, many business owners don’t know which reports they should be looking at (or even understand what they are supposed to look for).??

That is why I help them understand how to read their Balance Sheet, P&L, and Cash Flow Statement to determine how much money they are truly making.??

Once your business starts doing $250K+ or more in annual revenue, there are many common places where money tends to get stuck in your business ??.

We call this “hidden cash flow.”?

Your P&L may say you have $100K net profit, but your bank balance and wallet would disagree.? Money gets stuck in places like A/R, and pricing strategies.? So, what does a business owner need to do to solve this problem?

So what is there to do?

The first step is putting together a 12-month Financial Forecast ??.? This is the foundational financial report that will help you become more confident with your numbers and pay yourself competitively.?

This exercise alone helps you unlock an additional $25K-75K+ in owner compensation over the next 30 days ??.

It will unleash your entrepreneurial creativity to reveal revenue opportunities, expense savings, and a step-by-step plan to improve your Cash Flow.??

It might take you 3-12 months to see the fruit of your labor, but you cannot execute a plan that doesn’t exist.?

You can use your existing accounting software and historical numbers to create a Forecast without complicated spreadsheets.?

I can even show you how.? I developed this free 5-Minute Forecast to walk you through step-by-step.? You can download it from my Featured Section on LinkedIn, or CLICK HERE.

Profit Accelerator Resources: Whenever you are ready, here are three ways I can help you:

1. Financial Dashboard for Making Profitable Decisions This 30-day 1:1 workshop helps you become numbers confident and conversationally competent around the numbers in your business.?We work together to build your 12-month financial forecast, so you have a solid plan for improved profitability.
2. Business Plan Workshop If you are looking to obtain funding from a bank or investors, a well-written business plan and pitch are critical for success.?It’s a 1:1 workshop over 3-4 meetings and you’ll walk away with a professionally prepared business plan to help you raise the capital you need to grow your business.
3. Profit Finder Program I can help you uncover an additional $25K-$75K profit in 30 days or less. I have a knack for finding hidden profit locked inside your business. It may take between 3-12 months to achieve the profit lift, but you’ll have a clear-cut plan and strategy.

Remember business growth is a series of consistent small steps, not giant leaps. If your compensation is well below what you could earn in the open market, it’s time to have a conversation and see how you can run a great business AND pay yourself competitively.