Profit is how much money a business is making once all expenses have been deducted; cash is the amount of money on hand to pay due bills. According to entrepreneur Stever Robbins, even a profitable business can fail if the business has an unbalanced cash flow.Continue Reading
While a business may be profitable on paper, having inadequate cash on hand is likely to lead to its failure. This is because most businesses allow a grace period between when goods or services are delivered and when they are paid. A company without enough cash flow will be unable to pay its bills, which ultimately leads to the business's failure. British company Credit & Business Finance identifies poor cash flow management as the main reason small businesses fail.
Matt Quinn of Inc. recommends that companies with poor cash flow address the problem by following a few steps. First, set up a business forecast that will indicate where and when cash is coming in and when cash needs to be paid out, so these times can be financially balanced. Second, evaluate payment terms to ensure there is not too much grace period between delivery and payment. Ensure customers are paying on time, using collections if necessary, and evaluate the profitability of customers and inventory with an eye to eliminating any that are unprofitable. Finally, make certain that good cash flow is a company-wide priority.Learn more about Financial Calculations