Part 2 Cash Flow – The Oxygen and Blood of a Company

Business Basic – Profit and Cash Flow – Two Business Priorities

Part 2 Cash Flow – The Oxygen and Blood of a Company

Drain all the blood from your body and see how long you can survive without a quick and significant infusion. Cut off all oxygen to your body and you will expire in a finite matter of time. A company that runs out of cash will cease to exist without a significant infusion of cash.

Cash flow is so important that you should view it as oxygen and blood. There are times in a business life cycle that protecting cash is more important than protecting profit.

Cash gives you the ability to expand your business; Cash gives you the ability to seize opportunities;  Cash flow gives you the ability to borrow; Cash gives you the ability to “live to fight another day”.

We are making a major assumption that the business itself is viable and run on sound business practices. Meaning the business returns value to investors and makes a profit. If the business is not viable or properly managed then it will ultimately fail, which sometimes is the best business decision.

Monitoring and building cash is not flashy, exciting or “cool”. It takes discipline and effort to stay focused on sound business practices. Solid business practice of cash flow and profit management can be the anchor in times of crisis.

Several case examples:

1.)   Ford is losing billions of dollars a quarter. They are surviving because they are viable, have been profitable and built cash reserves.  Cash on hand that buys them time to make decisions to turn the operations back to profitability.  They cannot survive forever with losses but if management makes prudent, tough decisions and market conditions improve, they can again be profitable.

2.)    A small business that operated 46 installation trucks was severely affected by the gas spikes. The company was hit with both rising costs and reduced revenues because their customers were hit with the same impacts. The company could not sustain the cash losses so they traded a number of older trucks for new trucks on a 2 trucks for 1 basis. There was a paper loss associated with this approach but afforded significant advantages to the company. The company saved cash by eliminating 23 vehicle payments, insurance and employees. The vehicles and employees on the road now are all producing at maximum capacity. The company is producing less revenue but it is both profitable and running positive cash flow.

3.)    A manufacturing operation that continually monitored cash flow and profit, built a cash reserve over a number of years. A larger competitor built impressive sales and distribution by focused and quality marketing. The management of the larger company focused on sales numbers in lieu of profit and cash flow.  When the economy changed and the larger company faltered, the well run smaller company was in the position to buy the competitor at a bargain price. Applying their sound business practices allowed the combined company to dominate their market while making solid profits and positive cash flow.

Cash flow and profit must fundamentally be a component of best business practice.

 We want to hear what you think about this topic and questions you need answered for your business.

Rick Williams is an award winning businessman and the managing partner of the business consulting firm ProMMC & ProMMC China.  You can contact Rick Williams at rickwilliams@prommc.comwww.prommc.com

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