A couple of weeks ago, I posted a blog about isolation, and how isolation can kill a small business. If you are isolated, you aren’t learning new things like you should be as an entrepreneur. One of the things you aren’t born already knowing is how to study and understand cash flow for your business.
Most clients jump right to the P&L (profit and loss) and dive from the top line to the bottom line in record time, noting the gross revenue and net income. If those two numbers are to their liking, they move on to the next topic. But I want to issue a challenge to all my entrepreneur friends out there:
Learn to understand your business’ cash flow, not just its profitability and/or sales trends
Of course, those topics are related. Sales and profitability drive cash flow, but without adequate cash flow there are NO sales and certainly NO profitability. And as you may or may not know, there are items that impact your cash that do NOT show up on a P&L.
What are some common examples of uses of cash that are NOT presented on the P&L?
Understanding that cash flow doesn’t begin and end on the P&L is critical to your understanding of the health of your business. I’d encourage you to spend some time learning more about the balance sheet and statement of cash flows. Remember that your balance sheet starts on day 1 of your business and continues until the business is closed. The P&L resets every 12 months, so which statement do you think shows a better picture of your company’s health? Does your doctor get a better picture of your health by examining all of your health history or by looking at what you ate yesterday? You understand where I’m going with this.
Is it possible to have a business with huge annual sales increases and profitability showing no cash flow? It sure is. Make sure to learn how to interpret your business’ cash flow so you don’t become one of those businesses. Cash, as they say, is king.
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