One of the reasons I wrote the book “Simplify to Succeed” is that lots of people in business harbour a dirty little secret, or two. That is that parts of their business ‘education’ are missing and they ‘wing it’ at times when this starts to become apparent. None of us is the complete item, but some people find it hard to admit it. That’s why I wrote the book, it covers those questions I get asked a lot as a non-exec director.
A great example of this involves business finances. The most common issue with first time founders is knowing the difference between profit and cash flow and this is crucial. Many people think that these two terms are interchangeable and of course they are not. This is how I explain it.
Profit measures how much money is left over after paying all expenses from sales revenues. While some expenses will remain constant (such as rent or loan payments), others may fluctuate based on the season (such as costs associated with marketing campaigns, or the use of temporary staff). This means that while profits can be steady in one quarter, they could drop significantly in the following quarter. To get an accurate picture of profitability, you should track their revenues and expenses over a period of time. I often suggest using a moving annual average.
Cash flow refers to the difference between what you have coming into your business (revenues) and what you have going out (expenses). Unlike profits, which are determined by annual or quarterly results, cash flow is typically tracked on a daily or weekly basis. This allows you to anticipate the resources you will need in order to cover costs in lean times or take advantage of opportunities in booming markets. It’s also important for ensuring that your suppliers are paid on time, avoiding any negative impacts to your credit score or reputation or worse still the failure of a profitable business.
By tracking both profit and cash flow, you will be able to make informed decisions that will ensure long-term success.
OK, I’m done teaching many of you to ‘suck eggs’, you know this stuff right?
You will be amazed at how many people I meet who don’t and its not their fault, they have just never been taught.
