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Cash Matters!
What leaders need to know about financial reports
Cash is the lifeblood of any business. One of the most common reasons businesses fail is because they run out of cash. A company can consistently report a profit and yet still go out of business because it runs out of cash. So, it’s important to carefully manage the cash coming into the business and the cash flowing out.
Most leaders focus on managing the profitability of their business. That’s not a bad thing. However, that leads them to manage the business primarily using the “P&L” (or profit and loss) statement, more formally known as the income statement. It’s important to know that solely focusing on the income statement can lead you to miss dangerous timing issues surrounding cash flows that can kill your business. Let me give you just three simple examples of how the income statement can hide the true cash flows in a business:
- Revenue is recorded on the income statement when the product or service is delivered to the customer. Especially in business-to-business transactions, the customer may not pay until 30 or 60 (or even more) days later.
- The cost of the goods you sell are recorded when the revenue associated with those good is recorded, but in reality you might have bought the product (or the raw materials to make the product) months before you sold it…
