How much money does your company have available right now? That’s a question your cash flow statement can answer, but the first time you look at your cash flow statement, there’s a really good chance, I mean a really good chance you’re gonna be really confused. One of the very worst mistakes you want to avoid is confusing profit and cash. Today’s video will help you understand it in just ten minutes. Watch it right now.


One of the very worst mistakes I ever made was confusing profit and cash when I had my vending company about 40 years ago. Yes, I know, you’re thinking that profits and cash are the same thing. Unfortunately, it’s not true. If you don’t know what the difference is then you could have a similar problem as the one I had, and that is completely running out of cash while you’re profitable. I’m gonna bet, in fact, I’m gonna be sure, it’s not even bet, that this is something you would rather to avoid and yes, that’s the topic of today’s video.

Hi, I’m Josh Patrick. I’m the founder of The Sustainable Business, Cracking the Cash Flow Code, and a few zillion other programs. I’m also the author of Sustainable, A Fable about Creating a Personally and Economically Sustainable Business.

There’s one thing you do need to know, and that is profits are not cash and cash is not profits.

In today’s video, we’re gonna go talk about seven things you need to know about cash that might have little or nothing to do with profits.

First, I wanna tell you my story about running out of cash. I got into my first business when I was 24 years old, our first full-time business. In high school, I had the part-time stuff and in middle school I had my candy stand, which lots of kids have.

My first business started when I was 24 years old. Real business.

For the first three years of business, boy, life was good. I had great success, I had great profits. I thought I was master of the universe. The problem is, when you’re 24 years old, and you have a lot of success when you first go into business, you actually think it’s because, or at least I actually thought it was because I had this great, incredible, innate business skill. The truth is I didn’t. I was just lucky.

In fact, I could barely read a profit and loss statement.

I sort of knew how to look at a balance sheet, but I didn’t even know that a cash flow statement existed, much less how to read it.

Here’s what I was doing. During that first three years, our business was growing like crazy. We’re growing 20-30% a year. We were spending about a half-a-million dollars per year on new vending machines.

My profits were great. I thought life was good, and then the phone started to ring.

One supplier called, and then another supplier called, and then another supplier called, and they all wanted to know why we were 60-90 days out with them and they weren’t getting paid. I went to my controller, and he just kind of shrugged his shoulders. It turns out my controller was actually embezzling. That’s a different story altogether.

The truth was we were spending a half-a-million dollars per year on our vending machines, and that half-a-million dollars never showed up in our profit and loss statement until the end of the year when our accountants came in and adjusted our depreciation.

Life looked good to me. It looked like we were making five or six percent a year, which at that time was several hundred thousand dollars. I said boy, we’re really doing well. The truth was, profits were good, our cash stunk. Because our vending machine purchases didn’t show up in the profit and loss statement, I had this false sense that we were doing a whole lot better than we were doing.

I don’t want you to do what I did. I don’t want you to be a financial nincompoop when it comes to how to speak the language of business, which is finance.

The finance you need to know is how to read your profit and loss statement, how to read your balance sheet, and, most importantly, how to read your cash flow statement.

I’m gonna tell you, the first time you look at your cash flow statement, there’s a really good chance, I mean a really good chance you’re gonna be really confused. In fact, you might look at it and say “I don’t get how this thing is put together,” put it in a drawer, and never look at it again. I don’t want you to do that. Take the time, and it’s not gonna take that much time, maybe a half an hour, maybe an hour, to have your accountant or your bookkeeper or anybody who understands how to read a cash flow statement to explain to you where the numbers come from. It really isn’t that complicated. If I can learn it, I know that you can learn it, also.

First thing I want you to do is I want you to learn how to read a cash flow statement. I want you to understand your job is not really to create profits, although without profits, you’ll eventually run out of cash.

Your job is to create cash, and here’s why. Private businesses run on cash. Public businesses run on profits, or actually, profits are more important to cash. All businesses run on cash.

The truth is without cash, you’re gonna be out of business really quickly, and your big deal is creating enough cash in your business.

If you own a public company, you’re worried about what the market thinks about you, and that’s all based on profits. I have a question for you. One reason I see that people, especially in a service businesses, are not doing as well as they should is because they’re not pricing the products properly.

Are you pricing your products properly? You don’t have 2,000 hours a year to sell of your time. At best, you have 1,000, maybe 1,100. If you’re really efficient, maybe 1,200 hours. If you think you have 2,000 hours you’re selling and you’re pricing based on those 2,000 hours, you’re already under-priced by about 50%. Second question I want you to answer.

Are you creating enough sales in your company? If you’re not getting enough business coming in the door, that needs to be 100% of your focus.

Without enough sales coming in the door, your business isn’t going to exist, that’s cash.

You can have numbers put together, which are not coming in your profit and loss statement, not be in your balance sheet, and not even in your cash flow statement, which are predictive about how much you’re gonna have in sales coming in. That’s just, very simply, are you and your sales people making enough calls and having enough sales conversations that will bring in enough cash to keep your business running? Here’s another thing that I see happen all the time.

Receivables do not show up in your profit and loss statement. Let’s say I have $100,000 in receivables, my company, and I grow my company by 100%. That means I’m likely to have $200,000 in receivables now. I’ve just used $100,000 of my cash to lend to people who I’m doing business with, otherwise known as receivables. If you don’t know what your receivables are and how your receivables are growing, and manage your receivables, I can almost guarantee you that at some point, you’re gonna run out of cash.

Let’s talk about inventory for a second. This was a big thing in my vending company is that we, at one point, had over 200 SKUs, which are different items that we put in our candy and snack machines. Over the years, we knocked that down and knocked that down and knocked that down and we got it down to 25. I can tell you that when we went from 200 items in our warehouse to 25 items in our warehouse, we got back several hundred thousand dollars in cash in excess inventory that we were never managing.

By the way, when that inventory came back into the company, it showed up on our cash flow statement.

It did not show up on our profit and loss statement. My inventory was growing and not shrinking. I would have had a cash problem, because I would have thought my profits are great, life is good, I don’t have to worry about this. But, in fact, my cash would have been used.

Finally, realize that capital expenditures don’t show up in your profit and loss statement. That was my problem when I first got in the business. I kept buying lots and lots and lots of vending machines, which cost a lot of money, never showed up in my profit and loss statement. I was profitable. I thought life was good, and as I told you earlier, the phone started to ring. People wanted to get their money, wanted to get paid, and I didn’t realize I was gonna have that problem until it was almost too late.

I want you to have a program in place for monitoring your cash. I want you to do this on a weekly basis. I want you to have a dashboard that shows what your cash position is, how much in new sales you got coming in, how many sales call you and your staff are making.

What’s the size of the proposals you’re putting out? How much of those proposals are being accepted and becoming business?

Those are all things that you can do to monitor, to have an early warning system in place so if you know you’re gonna run out of cash or you’re gonna have a cash flow crunch, you can do something about it.

Just wanna let you know that what we just talked about is just the first step in managing your cash, but it’s the most important step because the first things you do. Once you take that first step, you’re gonna start learning about all the things that you need to do to make sure you have enough cash in your business. The truth is cash is king. In fact, one of my favorite little funny sayings I have is:

“Happiness is positive cash flow”.

I want you to be happy and I want you to have positive cash flow.

Why don’t you leave a comment below, and while you’re at it, download our INFOGRAPHIC that shows you the success path and how to create excess cash in your business. This is Josh Patrick. Thanks a lot for stopping by. I hope to see you back here really soon.



Topics: Video, profit, Sustainable Business, cash flow statement, cash flow, financial planing, cash flow mistakes

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