Wirawat Lian-udom via Compfight
When I was in college (the first time!) I had this line in the play A Thurber Carnival: “How can I be overdrawn when I have all these checks left?”
The corollary in business is: How can my checking account be overdrawn when I’m making a profit?
The answer is: profitability and positive cash flow are NOT the same thing.
It’s possible to have positive cash flow, but not be profitable.
And it’s possible to be profitable, but have negative cash flow.
Profitability means to charge more for your product or service than it costs you to provide.
Positive cash flow means that you have cash in your checking account to pay all of your expenses.
And both are essential to your business being financially viable.
Financial viability is a key concept in business and it’s an essential metric to asses the health and resilience of your company. If you don’t look at any other numbers, these two are the ones you need to be looking at on a regular and frequent basis.
No matter how big or how small your business is, no matter what legal form it takes, the same principle applies: A business has to be able to achieve its operating objectives in order to fulfill its mission over the long term.
I got my MBA at one of the first Green MBA schools in the country and we all had ideas of birthing companies driven by social and environmental justice. Our goal was to help heal the planet through business.
The notion of financial viability was hammered home again and again: it doesn’t matter how environmentally sustainable your mission, if you’re not making money, you’re not in business. Even non-profits have to be viable.
My job is to get you to there.
I help business owners like you to know what relevant financial information you should be tracking, then how to interpret and use that data so that you can run a profitable business and have positive cash flow.
Working together, you get clear about every facet of your business finances so that nothing surprises you.
Financial viability = peace of mind.
What’s your current challenge around your business finances? Post your comment or question below..
Beautifully done, Monique. Nice looking website. Looks quite sophisticated to me.
Thanks, Dad. Just did some upgrading to my website, so thanks for noticing.
Thanks for the clarity around profitability and positive cash flow. I can see I have positive cash flow but am not profitable yet. I know this because I have borrowed money for specific expenses. I am getting there to profitability, but I can see it is taking time…. Are there specific ratios or other specific indicators that would help a business owner see this more clearly? How often do you recommend looking at these indicators?
Thanks Monique!
Hi Teri,
Yes, there are two specific indicators that you can use right away: net profit and gross profit.
1- Understand what your company’s overall profitability is. At the end of the day, after you pay all of your expenses for overhead and operations, know what are you left with. This is your bottom line, your net profit. If you’re not in the black, then either raise your prices and/or lower your expenses and/or increase your sales.
2- Understand what each individual service or product’s profitability is. Only subtract costs from your sales revenues that are directly related to manufacturing your product or delivering your service. What you’re left with is your gross profit. If you’re spending more to make or deliver your product or service, that’s a real problem. Either raise your prices and/or lower your costs.
How often do I recommend looking at these indicators? Every month. Staying on top of your numbers is a great way of staying in relationship to your money and makes you a savvy financial steward of your business.
Thanks for asking. Hope that helps.
Great article Monique. You make these concepts so much easier to understand. Very much appreciated from this small business owner!
Michelle
Hi Michelle,
Thanks so much! Glad the unpacking helped. Hope you’re doing well.