Cash Flow Q&A: Revenue vs. Profit
Blaine and Barb discuss the roles revenue and profit play in disrupting your cash flow.
Blaine I’m going to ask you some touchy questions. Ok? So, and everybody can gage your response.
So, a couple questions…
And we get these often, Blaine, I have lots of revenue, am I profitable?
And secondarily, would you mind giving us some insight into financial reports that could lead me to understand my cashflow a little better.
I’ll circle back a little bit with the financial reports.
I’ve pulled this out before and I know I have had so many entrepreneurs say, that mimic the same thing that when I would get my financial statements at the end of the year…
My last business years ago that was typically what we would do, it was the box of receipts, you would go through the year at the end of the year, you’d have your good little sit down at the end of the year and find out about how you did.
Not, a great way to necessarily run a business. At that point the financial statements were generally pretty far out of date, I would look at them, and generally it was a little bit of well I don’t really understand that, yah I know I was there, I don’t need that info…
I think that, you know, entrepreneurs have to be looking forward, 90 percent of your time is figuring out how you are going to move forward, how you are going to improve your business, how you are going to grow, how you are going to become more profitable and financial statements don’t really help a whole lot in that area.
But, there is some really critical information that comes out of there. You want to know, were you profitable?
You do want to know, how much revenue did you generate with this engine you’ve built.
I made a lot of money, am I not profitable?
Yah, exactly and that’s the…it is we’ve talked about it before, revenue and profit are two totally different things, and so is cash flow.
The three of them are the three legs on a stool, if one of them is out of whack, you’re going to fall.
Now, cashflow is the one that will kill you almost immediately. Like it’s like being hit by a bus.
1 in 4 businesses Blaine. Go out of business due to cashflow.
Exactly, it’s due to cashflow and it’s…but when you start teasing out the issues around cashflow a lot of times you start going back far enough and it’s related to revenue you just did not have enough revenue coming in or you weren’t profitable, or the big one is you actually had a lot of revenue, you were profitable…
You just simply couldn’t get the cash coming in to get paid.
But, we want to talk about revenue and cash flow today.
So on the revenue side, it’s real simple. If you’ve got to make 2 million this year, you have to make it in 12 month, not 14.
So you need to make sure you are projecting your sales, projecting your revenue and figuring out how am I going to move this forward.
Not, looking back, last year won’t help me make sales this year. You have to make sure that you are on top of that and you are making sales this year.
One of the biggest ones is… one of the biggest red flags is were you profitable and if you are profitable, well weather you are profitable or not, you still need to dig around and uncover and find out where your profits are coming from, what services are most profitable, what products are most profitable for you? And calculate all of that out and understand what your net profit is for these different services, for these different products.
Make sure you are actually on top of that because you know, I’ve been guilty of it, I’ve done jobs before that felt like we were going to make a lot of money on and we just weren’t on top of it enough…
We maybe made a fair bit of money, maybe we even had cashflow coming in in the end we weren’t even profitable. We didn’t have that profit margin built in because we weren’t on top of it enough.
That is chronic in small business a lot of times small business owners will focus on something, they’ll focus on revenue, there is plenty of work or maybe these jobs, there is so much profit built in but there isn’t enough of it, you aren’t making enough revenue.
Those three legs of the stool your profit, your cash flow, your revenue make sure you are on top of all three.
We preach cashflow all the time because that’s the one that isn’t paid enough attention to, that’s the one that kills people.
They are not paying attention to cashflow, they just simply run out of cash even when they are profitable, even when they have a lot of revenue.
So stay on top of that and make sure you are looking at all of those factors in your business but of course in the end cashflow is the one that is almost going to kill you overnight. If you are not on top of it.
I have a question.
So, often you have referenced the idea of feeling profitable, like a feeling right.
So, how can we business owners, and accountants and bookkeepers safeguard against that feeling?
Yeah, it’s entrepreneurs tend to be highly optimistic by nature, I’m not sure you can actually dive in and be an entrepreneur without being optimistic. But, that’s where reality hits and reality is generally math.
So math is the buzz kill?
Well it’s not just the buzz kill, it’s also the one that can help you uncover the issue and turn something that wasn’t profitable into something that is highly profitable. Knowing those numbers, knowing how, like what your revenue looks like, what your sales look like…moving things around getting the timing down so you are dealing with capacity issues.
It’s amazing how it’s almost like addictive. You start with do I have enough money to make payroll on Friday and then you start going ok how am I going to make it through the month, and what does that look like? What does the next quarter look like? What does the year look like? What’s making us the most profit and as you build this up and understand more about your business, it’s completely transformative.
You are growing from something that feels out of control, you might have a little bit of profit at the end of the year and usually that little bit of profit gets sunk into the next year to buy something, upgrade something, whatever, expand a little bit from there into really understanding the key foundation of your business but it gives you the information to make the decisions and the moves you need to do to hire the right people, expand at the right time and the right way so that you become more and more profitable.
You become a healthier business, you have that war chest, that money sitting aside that is going to help you make sure that you can deal with the rainy days and expand your business.
It usually starts with the little things and we always say, start with your cashflow so that you are not going to be one of the four that goes out of business and start building from there.
The more you know, it’s like lifting the cloud, it’s like having your headlights, to high beams to a gps. It really makes a difference.
Well, thanks for expanding on that.
I appreciate hearing your views as always, that’s a very common question that we get on the website.
If you need further clarification, or if you want more information for our viewers, you can chat us up.