Robust ThemeDec 09, 2019 2020-04-08 7:40
Profit & Cash Flows | The Strategy Sprints™ Method
Cash flow and profit both imply 'coming in,' however, there is a key difference between them. Profit indicates the amount of money left after expenses, while cash flow shows how much money is coming in or flowing out of a business.
A single metric by which the health of a company can be understood is something investors and business owners often search for. They want to know the one number they should look at to determine whether they should make an investment, or pivot their business strategy. Cash flow and profit, as two critical and related financial metrics, often get pitted against each other: Which is more important?
There is no simple answer because both profit and cash flow are important in their own ways. As an investor, business owner, or entrepreneur, you need to understand both metrics and how they interact with each other if you want to evaluate the financial health of your business.
What are the key numbers in your monthly financial overview? As a CEO, you need to be guided by vital numbers in order to efficiently lead your company.
It is important that you get your sales and marketing numbers every week and to check your profits, balance sheet, and cash flow each month. The problem is, many people don’t get to see their monthly profits.
More importantly, revenue numbers alone don’t tell the whole story. Gross sales won’t let you determine your company’s health or if it’s headed in the right direction, and at the right pace. When you're missing out on 80% of the information, you’re essentially flying blind.
Decisions should be based on facts, not narratives and moods. Therefore, your decisions should be based on the numbers that matter.
At Strategy Sprints, this is how we do it.
Once a month, I check the profits, revenue, costs, and bank balance. I find out if there’s anything we need to pay or something we need to purchase. And there’s the cashflow which shows me what's coming in and what's going out. These are the numbers that count. If you know these, you’ll know your business and where it’s headed.
The percentages are just as important. For example, having an X amount of revenue at a profit rate of 83% is great. The same amount of revenue at a lower profit rate may be good or bad, depending on how it aligns with the pace and direction you want to steer your company towards.
Many companies experience early scaling, avoiding the chaos that comes with growing a business. However, overly rapid, unsustainable scaling causes many companies to collapse. The problem lies with focusing too much on revenue and not bothering to track profit margin.
That is why checking and reviewing your profits and cash flow every month is crucial. Another trick is to have your bank send you an email of your bank balance every day. Knowing whether your balance is going up or down is important information.
When you know which numbers are more important, it will help you digest and interpret your balance sheet more accurately. This is exceedingly useful in making you a better decision-maker, and thus, allowing you to take your company to greater heights.