Entrepreneurs Know Profits and Cash are Different

By: Art Consoli
Submitted: 2007-01-17 11:50:04
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"How come there's never any cash in the checking account?"

How many times have you asked yourself that question? You know the business is making money. The Profit and Loss statement shows a profit every month. You are constantly signing checks to pay the quarterly tax payments. Every time you go to the bank for a ninety day note, your banker agrees without batting an eye -- just passes over the papers for your signatures.

And he tells you, "That business of yours sure cranks out the profits and it just keeps growing. What a gem."

But where's the cash?

If your business is growing at a rate of 30% a year, and your gross profit is 25%, you will always be out of cash. It's amazing, but unless the business generates high profits, even moderate growth will kill a business. The business can survive only as long as it has sufficient credit to borrow money -- more money each time it goes to the bank. But when the debt service closes in on the cash flow, any downturn in sales, or slowdown in collections, or increase in costs can stop the availability of credit.

How do you increase profits? Raising prices is a good way to start. My barber understands the supply/demand curve as well as anybody I know. He runs a one-man shop and works only by appointments. When he starts to see new faces looking for appointments (more demand), he raises his prices. Certainly some of the old customers leave and try another barber but they soon come back (he's that good.)

He's also constantly improving his business by getting rid of problem customers. If you don't show up and you haven't called to cancel (causing him to lose the income for a time slot) -- he just doesn't have any time available when you call to make an appointment.

It's easy to raise prices and increase profits when you provide a quality product.

You might create higher priced product presentations based on the same product or service. The fast food people learned this long ago. "Would you like me to super size that?"

Do you really think a Cadillac costs twice as much as a Chevy?

You could bundle companion features into a single product. "Would you like the extended warranty with this purchase?" Or, "So long as we're here checking the AC unit, would you like us to clean the air ducts?"

Another issue that drains the cash is principal payments on loans outstanding.

This one caught me when I first started in business. The P & L doesn't track cash or the principal payments made on the loans. The only way you can see these is to look at the balance sheet and note the loans payable balance decreasing each month.

Most entrepreneurs now make good use of the flexibility in terms available from lenders as they compete for good borrowers. I always made it a practice to negotiate an interest rate, an amortization schedule, a due date, and a pay rate. When I had these in my loan documents I knew I was in control of my cash flow.

My partner for many years used to say that "profit" was a term created by the IRS so they would have something to tax us on.

Maybe so, but when you are starting out, don't let the accounting entry under "Profits" fool you into thinking you are successful -- check the cash.

Art Consoli held eight corporate positions with Johnson & Johnson before starting his first business. He went on to build over twenty businesses from patents or ideas or from businesses others couldn't make successful. These ranged from starting a veterinarian drug company to taking over a steel fabricating company to developing the first manufactured home subdivision to qualify for every private and government assisted mortgage program in Arizona. He also did ten workouts for lenders and owners; the last was a $30 million, 300 employee, precision parts manufacturing plant that made parts for the auto industry. Consoli's unique background and skills allow him to speak and write about how someone with limited experience can do a self-evaluation which will let him decide which business opportunity is best, how to evaluate opportunities and gain control over the one which offers the greatest potential and then manage that business to success. Readers of his book call and write to tell him how much his book has helped their lives and improved their business.

Article source: Expert Articles