Let’s play a game of “Would you rather?” or “Agree or disagree?”
I've recently been talking a lot with my coaching clients about the issue of cash flow. It’s a topic that comes up often in business.
Some will say, “It's not about making a profit; cash flow is king.” And to some degree, that's true. And to some degree, it's false, right?
Because if we're in business to be in profit, then it IS about profit. You'll hear that on Shark Tank a lot. The sharks will ask the people, “Is this a hobby business? Or is this a business for profit?”
And there's no shame in anything being a hobby business, but if we're in business to make a profit, then profit is ultimately important.
And I certainly know that from my work as bankruptcy counsel, for many years, I would run into businesses that were not operating at a profit. And they kind of knew, or they knew that they should have looked at it, but they didn’t.
If you're in business to make a profit, and if, at the end of the day, you're not profitable, then over time, the business will become insolvent; it won't make as much income as its expenses or its debts.
Is it a Profit Issue or a Cash Flow Problem?
Let's say that you don't turn a profit until month four. Maybe you have some large projects out there, and they either take a while to acquire, or you have to input a bunch of labor and services to get to month four, when you’ll receive the payday. And when you receive that payday, it pays for the expenses to get to month four.
When you add up all the income in month four, sure enough, you’re profitable. Profit (as you know) means we have more income than expenses – all the expenses (all the real expenses, not just the ones we write down), including our tax liability.
So, let’s say at the end of month four, you’ll have $2,000 left after all of your monthly expenses are paid (including paying yourself and paying taxes). That’s great! But at the end of month one, you do not have enough income to cover your expenses.
You have a cash flow problem.
You don't have the income to pay all of month one’s expenses because you haven't gotten to month four yet.
Working Around a Cash Flow Problem
I can only think of two ways out of this predicament.
Option 1:
The first option is to borrow money. And I want to warn you upfront that this can be dangerous.
If you're going to be profitable at the end of month four, then you just need the money for month one expenses, right? Borrowing money from a family member, a credit card, or a bank in the form of a line of credit provides the cash flow to get you to month four.
But again, this can be dangerous. So, why can this be dangerous? One reason is that you might not actually turn a profit in month four, which means you won’t be able to pay off what you borrowed. Over time, the line of credit grows too big and swamps over the side of the boat, and the business becomes insolvent.
Another risk is that you might lack the discipline (like I used to) to manage the debt. You might get to month four and have the money, but you don't pay off the debt. You use the cash for something else, and then it’s gone.
Lastly, if you borrow from friends or family, you not only risk not having the money to pay them back, but you also risk creating strained feelings between your friends and family. That’s never a fun feeling.
Imagine borrowing money from a relative and then later describing this awesome vacation you are planning with your family…If you still owe them, just imagine that weird look they’ll get on their face or the comment they’ll make about how it “must be nice to take that vacation!” To me, it is not worth any of that.
So, if you have cash flow problems, it can be risky to borrow money because of the reasons I’ve listed. Just know that you'll also run into many successful business people who will tell you that's exactly what they did. Still, I don’t recommend this option.
Option 2:
The second way to handle cash flow is a much safer way to do it, but the emotions of it can also be much more difficult.
In reality, you are really earning X amount each month consistently, and it is less than your expenses. This means you’ll need to shrink your expenses down to match the size of what you are earning in reality, which may mean shrinking your staff to lower your overhead so you can start earning more than your expenses again.
I call this “shrink to grow big again.” And hey, let’s face it. It IS how you started. When you first started your business, your income would often meet or exceed your expenses. As you’ve grown over time, those expenses (typically staffing) are now beginning to exceed your average revenue each month, which is causing a cash flow problem.
Sometimes, you have to take a step back to take a bigger step forward.
So, What’s the Verdict?
You might have guessed my final answer would be a bit complex, and it is. Here’s my final take on the following:
Agree or Disagree? Cash Flow is King.
Agree. You need cash flow to pay for expenses, including staff.
Agree or Disagree? Profit is King, too.
Agree. You want to make a profit so your business continues to grow.
Agree or Disagree. Cash Flow is More Important Than Profit.
Disagree. You need both to thrive in your business and in life.
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