Why Cash Flow is More Powerful than Profit

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October 5, 2017

Every business wants to increase cash flow, and it’s an easy concept to understand, earn more and spend less. Sounds simple, yet applying that to a business can prove to be tricky. It can resemble a puzzle with many pieces that need to fit just right. And without strong financial leadership, you may end up with missing pieces.

Let’s walk through how cash flow impacts your business.

Profitability Does Not Equal Cash

Did you know that a business can be profitable and have negative cash flow? While profit can certainly lead to positive cash flow, it is only part of your financial situation. Showing a profit on paper isn’t worth a dime if your cash flow is negative. These types of deceptive situations may indicate a slow leak, and if left unattended, can be catastrophic.

What exactly is cash flow if it’s not profits? Cash flow is the total amount of money transferred in and out of a business. A positive cash flow is a sign that liquid assets are increasing, you’re paying your debts and expenses, you’re reinvesting in the business, and you have a cushion protecting the company from future financial obstacles.

Timing is critical in cash flow because you are balancing what’s coming in with what’s going out – making sure that everything is running smoothly. The key to it all is to identify someone with strong financial skills, an arsenal of strategic approaches, and the time to focus on each moving part.

When You Don’t Track, You Can’t Plan

Monitoring cash flow should be a routine part of running the business. If you are only seeing or reviewing cash flow statements quarterly or annually, you are operating in a reactive mode. When your business is at stake, reactive isn’t going to cut it. The implementation of a cash flow management process delivers a real-time understanding of your financial health and moves you into a proactive position.

Knowing your cash balance in real time is critical. When that element is absent, you make business decisions using inaccurate or incomplete information. Having a financial champion to lead this charge can directly contribute to a boost in both cash flow and profits for the business.

Everyone can agree that being able to address issues before they become a problem is a far more superior than waiting until they have a negative impact on success. When you are aware of what is happening, and when it is happening you can adjust, plan and make better, more strategic business decisions.

Putting it All Together

Mastering your internal generation of cash requires a sophisticated look at the big picture and an eye for innovative approaches to create sustainable cash flow drivers. This may include enhanced accountability, process automation, setting measurable goals, and having the right tools to manage revenue and pipeline.

Having it all together doesn’t mean you won’t face challenges, but it will put you in a better position to handle and recover as they arise. Overcoming cash shortfalls hinges on early awareness and proactive preparedness. For a CFO this is just part of the financial roadmap they design for an organization. Driving the vision, goals, and growth of the company is at the heart of their responsibilities.

Next Steps to Success

A companies’ overall success strongly correlates with the effectiveness of their cash flow management. Properly managing, tracking, and projecting cash flow is a big commitment and one that is best handled by a CFO. Because of this, it’s one role that often goes unfilled due to limited resources. If you are in a similar situation, and interested in taking that next step, let’s talk. SN developed CFO Advisory Services specifically for organizations just like yours. Reach out today to get in control of your cash.

Heather Zecher

Categories: Accounting