Profit vs. cash flow can feel like a mystery when your financial reports say you made money, but you’re worried about covering payroll. Where did the money go, and what should you review to find out?
In this special Halloween edition of Biz Help For You Quick Tips, Candy Messer investigates “The Case of the Missing Cash.” Through a client story, you’ll learn why growing revenue doesn’t guarantee greater profitability and how to understand what’s happening to your cash.
When Growing Revenue Hides Shrinking Profit
Candy’s client had generated roughly $3 million in annual revenue a couple of years earlier. The business was now on track to earn $7 million, with a goal of reaching $10 million.
Despite that growth, the owner frequently worried about making payroll.
A financial review revealed that the business had been most profitable, both in dollars and net profit margin, when annual revenue was around $3 million.
If you’re chasing a bigger revenue number, this story gives you a reason to examine what you’re keeping along the way. More work can mean less return when your pricing and processes don’t support profitable growth.
How Pricing and Processes Affect Your Margins
The owner was proud that every proposal received approval. Candy flagged that as a possible sign that the business was underpricing its services.
Payroll expenses were also taking up an increasingly large percentage of revenue. Workers may have been waiting for supplies or for someone else to finish a task before they could begin.
Meanwhile, change orders lacked documented approval. When the business requested payment for additional work, customers sometimes refused the charges.
Review your pricing to make sure it accounts for overhead. Examine downtime that could increase labor costs, and document approvals for additional work. Candy recommended electronic signatures to help support those charges.
“Profit and cash are two different things.”
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Your reported profit tells only part of the story when you’re assessing whether you can cover upcoming payments.
Alt text: Quote graphic reading “Profit and cash are two different things,” attributed to Candy Messer.
Understanding Profit vs. Cash Flow
Lower profitability wasn’t the only reason cash was tight.
Three individuals received monthly distributions outside payroll. Those distributions reduced available cash without reducing reported profit because they represented payments of equity rather than business expenses.
Your cash may also go toward debt payments, equipment, inventory, or owner draws. You may still be waiting for customers to pay their invoices.
To understand where your money went, look beyond your profit and loss statement. Review your balance sheet and cash flow so you can see more of the financial picture.
Plan for When Cash Comes In and Goes Out
Track when you expect invoice payments, when bills are due, and when you’ll need cash for payroll.
If your review reveals a potential shortage, consider whether you could encourage customers to pay earlier, discuss extended due dates with vendors, or reduce expenses.
Understanding those dates gives you a chance to address a shortfall before a payment comes due. Your profit matters, but so does having cash available when you need it.
Watch the Full Investigation
Watch “Profitable but No Cash? The Case of the Missing Cash” for Candy’s full explanation of what went wrong and the recommendations she shared with her client.
Use the episode to guide a closer look at your own pricing, processes, financial reports, and cash needs. You may find that your missing cash has an explanation you can act on.
