Queen Cash Flow, & Prince Profit
Christian D. Malesic, MBA, IOM
t takes cash-on-hand to run a business. Cash allows bills to be paid, payroll to be met, and capital improvements to fuel expansion. Cash, however, depletes quickly and must be replenished by a steady cash flow stream for the business to survive, even in the most prosperous times. In the new economy, poor cash flow kills companies.
outflows are greater than inflows (negative cash flow), cash-on-hand buys you the desperately needed time to correct these problems. They will both need to be corrected to survive; cash buys you the time to figure out how to turn it around. Ironically So, for example, a firm may measure prof- enough, by definition, the cash your firm itability monthly, quarterly, and/or annually has now came from positive cash flows and which means they are comparing the inflows profitability at some earlier point in the Cash vs. Cash Flow of revenue minus the outflows of expenses company’s history. It was neatly gathered vs. Profit to determine which was greater during the together annually in the Retained Earnings The common experience of preparing to period. If inflows were greater, the company line item of your Balance Sheet and stored wash your face provides a simple analogy was profitable. If outflows were greater, the in your savings account. for these complicated and intertwined company operated at a loss. financial metrics. Both the spigot and the Absent actual cash-on-hand, the firm drain represent cash flow which can be furEach measure of financial accomplish- must turn to debt in troubled times. ther defined as inflow (spigot) and outflow ment is necessary. What’s more, increasing Unfortunately, banks and lenders are slow (drain). The water pouring into the sink each measurement is essential to continued to loan cash to troubled companies. Thus, bowl is analogous to the revenue flowing operations and growth. if your firm is in a crisis and you did not into the company. For cash inflow, it does execute a financial disaster preparedness not matter whether the product/service was plan when times were better; there is little you can do other than to liquidate assets. If, sold at a profit or loss, only that revenues King Cash flow in. Conversely, all of the expenses of King Cash rules the kingdom. The larger on the other hand, all three metrics are up, the firm, from the electric bill to insurance your firm’s pile of cash, the better you can now is the time to apply for, or raise, the to payroll to vendor charges, are represent- sleep at night. Though savings does not firm’s credit line. This is best done with a ed by the drain. Just as water flows out solve problems, it does give you something recently signed large contract in-hand and of the sink bowl, cash outflows from the unattainable otherwise: time. If the firm is the latest financial statements neatly printfirm. The water accumulating in the sink operating in the red (unprofitable) or cash ed and expertly bound. 10
AT HOME IN BERKs April 2015
bowl represents cash-on-hand. Finally, the increases (profit) or decreases (loss) in the amount of water in the sink bowl, from one measurable time to another, represent the profit of the company.