Both Cash and Profits are necessary to build a Business.
- Profitability is managed by the profit-and-loss statement.
- Cash and Cash flow is managed from the Balance Sheet.
Each month your P&L tells you whether you earned a profit or had a loss. It does not tell you how much cash you have! You must turn your profits into cash by collecting your receivables and paying expenses to produce those revenues.
You can be profitable and go bankrupt if you run out of cash. How?
- A builder, general contractor, or someone else doesn’t pay you.
- You grow profitably so quickly that you run out of cash.
You are drawn into a lawsuit.
Profitability does not ensure business survival. Many contractors have a month or two months that are not profitable. Others have an unprofitable quarter and work the rest of the year to make up the losses. What they aren’t realizing is that they are also working the rest of the year to generate the cash they need to survive that quarter the following year.
- Be profitable. Without profits, you won’t generate the cash you need to survive and thrive.
- Determine your cash needs each month. You can calculate the cash you need from a cash-flow projection.
The Cash-flow statement looks at collections from sales — not the sales themselves. So, if you collect COD for residential service and replacement, then the sales for the month should equal the collections for the month.
Commercial collections are 30 to 60 (and sometimes 90) days after the work was completed. So, you might have a sale in January and not get paid until March.
COGS are the cost of goods-sold disbursements — labor, materials, subcontractors, commissions, etc. Good managers manage both profitability and cash.
You need both for a successful business.