The Corner Office MBA: Cash Flow is King

By Dave Richardson

Business is tough, the economy is unstable. You need cash flow to make payroll and pay bills. Wait! No, you need profits to make payroll and pay your bills. No, wrong! If you have more cash flow coming in this month than bills then the cash flow has kept you alive a little longer until you can make a profit.

So….if you have $20,000.00 in bills due this month and you can get $20,000.00 worth of cash coming in to pay the bills you survive another month. The problem is in order to get the $20,000.00 in revenue you have had to cut prices to get the business. You then spend $22,000.00 to operate the business for another month, which will be due next month.

Next month you do whatever it takes to get $22,000.00 in cash flow to pay the bills. No matter what, you have to have $22,000.00 in cash flow to pay the bills even if it costs you $25,000.00, which of course will now be due the next month.

Hopefully when times were good you saved up. In the above scenario, if you have $50,000.00 in a line of credit or extra in your operating account maybe your business will survive another 12 months or so. Or maybe you can last 2 months with no cash flow.

As you can see, depending on how deep your pockets are, you can do this for only so long. Some day you will have to start making a profit or lose your business. You could cross your arms, pout and vow that you’re not going to cut prices just to get work, and there goes your cash flow. You will be out of business…soon. Or, you keep your customers happy, lower your prices, and bring in some cash flow.

Businesses that have a large amount of overhead, expensive equipment payments, or grew too fast will not last as long as those who managed their growth and overhead. To survive you may have to restructure your loans to spread out the payments, sell excessive or unused equipment and inventory. Sometime you have to trim your staff.

Cash flow does not equal profit. Not making a profit does not mean you will go out of business, however eventually to stay in business you will eventually need to run your business in a profitable manner.

About the author: Dave is the Founder and President of Crush It Inc. , a custom concrete and asphalt crushing company based in Florida. He and his wife, Lisa, grew the company from scratch into one of the largest and most successful in the state. Check them out at http://www.customcrushers.com/.