There are many factors that contribute to a successful business. Planning, strategy, leadership, and execution all come to mind. These are the cornerstones of a productive organization; most great companies we have come across do these things well. And when we speak with many business leaders, these are the items they immediately address when we ask about their business goals.
Underneath all of these high-level items are the numbers. The numbers are what we use to measure business success. And while the numbers don’t always tell the whole story, they often tell a pretty significant part of it.
The Numbers Don’t Lie
You cannot ignore the numbers. Numbers provide an outlook on businesses health and wellness, along with comparative data so you can see how your execution compares to your strategic plan. While profit is, without question, a key indicator of business success, there are nuances associated with profit – especially as it relates to cash flow.
Would you believe us if we told you that your business can be making money and not have any cash? Depending on your balance sheet and access to credit, it’s possible to be driving strong profit but be hampered by cash flow. And many business owners don’t understand how.
A simple explanation is this: With revenue recognition allowing you to realize a sale when it is invoiced, you can actually have a large amount of revenue show up on your income statement. With healthy margin and well-managed operating expenses, this can yield a healthy bottom line profit. However, if you haven’t been paid, your balance sheet is sitting with a receivable. A receivable can be used as leverage to borrow, but until you either do that or collect the money, you are showing a profit without cash flow. An array of factors, including number of transactions, gross profit, days outstanding, and cost of money, can all impact your businesses cash flow. But profit alone doesn’t equate to cash flow, and a business without cash is going to struggle no matter how profitable.
Cash Flow is King
Cash flow and cash flow planning are every bit as important – if not more important – than profit planning. As mentioned above, a good business plan along with well-managed expenses should yield profit. But execution relies on a business with adequate resources for continuing your operations.
Having sufficient cash flow allows you to meet obligations on time, which puts you in a stronger position with your suppliers and employees. In addition to just meeting the basic expense requirements of your business, sufficient cash flow is the key to a business being opportunistic.
Whether it’s an opportunity to take on a new customer, hire a new, employee, or even consider an acquisition, companies with healthy cash flow and balance sheets are more likely to be able to take advantage of strategic growth when these opportunities arise.
Integrators with strong cash flow are better able to strategically plan, lead, and execute. This isn’t a coincidence; it’s because cash flow may just be the single most important number for your business. –NSCA Executive Director Chuck Wilson and Bronswick Reicin Pollack, Ltd. Managing Partner and CPA Jeff Bronswick