15 May From IBM to Mom and Pop, Cash Flow Matters
I read where Moody’s recently downgraded its rating for IBM based on cash flow and profitability concerns. In other news, Denbury Resources reported a first quarter profit of $21 million, but “cash flow is now well below the amount needed to fund the capital budget of $300 million. So the company needs to borrow money to maintain the current production or show modest growth.”
While cash flow fluctuations may alter stock values for behemoths like IBM and big boys like Denbury, for smaller businesses a steep drop in cash flow spells disaster. Cash is the lifeblood of your business – without it, profits are meaningless. That’s why it’s so important to be able to forecast and head off cash flow problems before they metastasize into a business-killing condition.
If they had stayed on that course they would have been out of business within nine months.
Working with this husband and wife team, we identified a number issues negatively affecting their business. By managing very specific aspects – labor and direct materials for each of the technicians they were using and adding new equipment and inventory while managing the cost and timing of these items – we were able to not only save the business but also change the outlook over a five-year period. The result was a swing from $100,000 additional debt to being debt-free with more than $250,000 in cash reserves.
As you study the cash flow outlook for your own business, keep these points in mind:
- Principle 1: Cash is Your Lifeblood. Since there is nothing tangible returned by profit alone, the logical conclusion is that without cash conversion there is no REAL profit.
- Principle 2: Generating cash is the most important aspect of profit management. Conversion of profit into cash in the shortest possible time frame should be a goal of every organization.
- Principle 3: Profitability and cash flow are inextricably linked. You must have profits to produce cash and you must have cash to produce profits. The cycle cannot be broken indefinitely without seriously negative results.
Even though it is possible to have a scenario where a company is operating at breakeven or with losses and also having a positive cash flow, it is a short-term condition that cannot be sustained.
Bottom line, there is no free lunch.
You need cash to purchase each item your business needs, and it will have to come from somewhere, either from operations or outside funding. Although the situation is somewhat fluid, the reality never changes – cash is essential to produce the profits your company needs to survive and thrive.