profits don’t mean a thing if they’re not represented by cash.
by ed mendlowitz
77 ways to wow! the handbook for small-business advisory services.
cash is the lifeblood of a business. cash amounts. cash flows. cash changes. no matter what anyone tells you, cash is the bottom line you must watch and accumulate.
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simplistically, knowing your cash balance gives you a sense of how you are doing. if it goes up, you are making money – if it goes down, you are losing money.
of course, not everything is that simple. there are factors such as accounts receivable and inventory that can increase and have profits absorbed there, or accounts payable can decrease, also absorbing profits, as can unfinanced equipment purchases.
“happiness is a positive cash flow.” – frederick adler, venture capitalist
i have seen many extremely profitable businesses consistently plow the profits back into the company and even borrow to pay the income taxes with the owners taking next to nothing out for themselves to grow their personal net worth – and then the business hits a losing streak and doesn’t have the internal or personal resources, i.e., cash to meet the challenges it is confronted with, hastening the decline.
profits, in the true sense, should be measured by the increase or decline of cash balances. the owners should become sensitive to cash changes and should measure the profitability of their business by actual cash flow and not by the accountants’ definition of profits.
most financial statements include a statement of changes in cash balances. this is usually skipped over with the major attention being given to the balance sheet and profit and loss statement. the statement of cash flows should be reviewed carefully to see where the profits are being absorbed and what can be done to reverse downward trends in the cash balances.
at the end of the day, we accumulate and spend cash and its various iterations of liquid assets. no matter how wealthy you are, happiness is created by a positive cash flow.
some more information
do you understand blood? perhaps not, but you know that your body needs it, or you will die. the same with cash – your business needs cash or it will die. however, unlike blood, you need to understand the flow of cash.
- fact: a growing business is always short of cash.
- fact: a declining business usually starts its decline with a spurt of cash.
- fact: a business will have its most cash ever when it liquidates.
- fact: it is easier to obtain loans when you don’t need the money than when you do.
- fact: most businesses do not apply for a loan until they need the money.
- fact: profits don’t mean anything if they are not represented by cash.
- fact: cash must be managed.
cash flow is the movement of cash in and out of the business.
everything you learned about balance sheets and profits is a myth if you cannot write a check to pay your employees’ salaries, your rent or your salary.
happiness is a positive cash flow. manage your cash flow successfully and you will be happy.
five sample reports
the reports that follow are not necessary for a manager to do their job. however, i believe they show ways to visualize and understand cash in and out, i.e., cash flow, in a company or not-for-profit organization. sometimes we lose sight of the basics. the purpose of the reports being included here is to bring you back to the basics – the cash that comes in and goes out.
sample 1: daily cash balance report
sample 2: daily cash balance report with held checks
sample 3: daily flash numbers’ report, version 1
sample 4: daily flash numbers’ report, version 2
sample 5: daily cash and loan balances report
