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iture x 100 Income-Expend Expenditure % Profit/Loss = e year 2011 th in s ie n a p m e co liom US$) of fiv il m n (i re u it d n e Income and Exp

King Cash

55

Queen Cash Flow

50 45 40

& Prince Profit

35 30 25

By Christian D. Malesic, MBA, IOM

20 15

It takes cash-on-hand to run a business. Cash allows bills to be paid, payroll to be met, and 10 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 5 prosperous times. In the new economy, poor cash flow kills companies.

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Cash vs. Cash Flow vs. Profit The common experience of preparing to wash your face provides a simple analogy for these complicated and intertwined financial metrics. Both the spigot and the drain represent cash flow which can be further defined as inflow (spigot) and outflow (drain). The water pouring into the sink bowl is analogous to the revenue flowing into the company. For cash inflow, it does not matter whether the product/ service was sold at a profit or loss, only that revenues flow in. Conversely, all of the expenses of the firm, from the electric bill to insurance to payroll to vendor charges are represented by the drain. Just as water flows out of the sink bowl, cash outflows from the firm. The water accumulating in the sink 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. So, for example, a firm may measure profitability monthly, quarterly, and/or annually which means they are comparing the inflows of revenue minus the outflows of expenses to determine which was greater during that period. If inflows were greater, 14

AT HOME IN BERKS OCTOBER 2012

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P Company

the company was profitable. If outflows were greater, the company operated at a loss. Each measure of financial accomplishment is necessary. What’s more, increasing each measurement is essential to continued operations and growth.

King Cash King Cash rules the kingdom. The larger your firm’s pile of cash, the better you can sleep at night. Though savings does not solve problems, it does give you something unattainable otherwise: time. If the firm is operating in the red (unprofitable) or cash 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 enough, by definition, the cash your firm has now came from positive cash flows and profitability at some earlier point in the company’s history. It was neatly gathered together annually in the Retained Earnings line item of your Balance Sheet and stored in your savings account. Absent actual cash-on-hand, the firm

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Expenditure Income

must turn to debt in troubled times. Unfortunately, banks and lenders are slow to loan cash to troubled companies. Thus, if your firm is in a crisis and you did not execute a financial disaster preparedness plan when times were better; there is little you can do other than to liquidate assets. If, on the other hand, all three metrics are up, now is the time to apply for, or raise, the firm’s credit line. This is best done with a recently signed large contract in hand and the latest financial statements neatly printed and expertly bound.

Queen Cash Flow King Cash rules the kingdom as its head of state; but Queen Cash Flow is its neck. And everyone knows the neck turns the head. Thus, assuming your firm is not cash rich, the metric that rises above the others in demand for your attention is cash flow.

Imagine a situation where the company is profitable on paper, meaning it is selling its goods/services for more than the cost of delivering them; but, cash is not flowing. This would mean revenue is due in as Accounts Receivable; yet, has not arrived at the firm’s door. How long can a company survive? Assuming the firm has no cash-

Profile for Christian D. Malesic, MBA, CAE, CMP, IOM

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