Don't Just Know the Numbers, Know the Right Numbers

So you believe numbers are important. But what numbers? Sales, cost of goods, labor, and profit numbers get the most attention. But there is a number that doesn't appear on the P&L, yet it's more important than any that do. It's cash flow, the financial umbilical cord. Lack of growth does not cause all business failures. Some fail because they grow too fast. Failure, often caused by lack of cash, can occur even when the P&L shows an acceptable profit.

If you have a profit of $10,000 and accounts receivable increase $15,000, you lost $5,000 net cash, less depreciation. That's a profitable way to go broke.

Profit and cash are not the same. It's imperative we know what's happening to the cash account. Did it increase? Did it go down? How much is in the bank?

Here's a simplified monthly cash flow analysis format that provides an important overview of what's happening in the checkbook and how it can differ from reported profit.

Simplified Cash Flow Analysis

Summary

In this example, the profit statement indicates a profit of $15,000. The cash flow analysis, however, shows an operating cash flow of only $1,500, and a hard cash flow–after adjustment for increased accounts receivable of a negative $1,000.

Is it possible to have a substantial profit and be broke at the same time? You bet.

Too many businesses look at profit, too few at cash flow. Your chances of staying in business, particularly in the first five years, dramatically improve if you pay more attention to cash flow than profit.