PROFIT OR CASH? WHICH MATTERS MORE TO LENDERS?

There is a difference between positive cash flow and profitability.

There are several factors that can increase profitability but may not generate positive cash flow.

Here’s a story to help explain

In September, Brenda’s Asphalt Inc. put in three new driveways for businesses in town.

She charged each business $10,000. The businesses each have 90 day terms on their invoices, meaning they don’t have to pay Brenda until December.

She paid her employees a total of $22,000 in September for their part in laying these driveways.

The sales of $30,000 will show up as sales in September, but not as cash until the money actually comes in three months from now. Until that time, that $30,000 will show up as accounts receivable.

The wage expenses of $22,000, however, will show up both as an expense and as a cash outflow in the month of September.

On paper, Brenda netted $8,000. But in terms of cash, Brenda is $22,000 in the hole.

This is the difference between your profit & loss statement and your statement of cash flows. Both are important, but they tell different stories. Imagine if Brenda was horrible at invoicing or collecting on her invoices. Imagine one of her customers doesn’t pay by the agreed upon date. Not only will this affect her profit on paper, but it perhaps more importantly, negatively affects her cash. We say it all the time “The only paper that matters is cash.”

When a bank, community lender, your Uncle Lenny, or an investor looks at your business plan and financial projections, they are going to first flip to the statement of cash flows to see if you can support your current operations and if you will be able to pay back the money you are asking for from them.

You must be able to tell your audience when your business will be cash flow positive (when cash in exceeds cash out), how much your cash balance will grow by, and how you will be using your cash reserves. Be prepared with those answers, and you will at least get your foot in the door.

Tidrow Capital Group, LLC is a privately held business advisory firm that specializes in helping businesses strategize their funding needs and gain access to the capital they can use to grow with confidence