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Don Sabelhaus
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Don Sabelhaus   My Press Releases

Cash Flow Is A Good Start To Profit

Published on 7/9/2015
For additional information  Click Here

I am often amazed at how people equate "cash flow" with profit; there is quite a difference. I remember many years ago while managing a manufacturing business for someone I met in my career at the time discovering that he was actually losing money on every unit that went out the door.


I arrived at my conclusion by "running the numbers". I found the per unit cost by adding the material cost, the labor cost, and the cost of overhead;  all that was required was to compare the sales price with the manufacturing cost and voila.

    
  
After meeting with the owner and telling him he was loosing money on every unit that went out the door he confidently told me that’s ok we’ve got good cash flow. Yes he had units going out the door every day and checks coming in every day a good flow of cash.


An analogy: imagine a one-gallon bucket, a paint bucket for example, now imagine a quarter inch hole in the bottom of the bucket and it is full of water. Now there is a garden hose inserted in the top of the bucket and the water trickling in is the same amount that is escaping through the hole in the bottom of the bucket.
  

As you might guess the hole in the bucket is the loss per unit, the trickling garden hose is the cash flow; now shut off the garden hose, and in a short time, the bucket is empty.


What does this prove you may ask, to me it proves a business needs more than a good cash flow it needs profit. After my meeting with the owner I decided to move on to greener pastures as there was no future there as far as I could see and in less than 2 years he had to close the doors when there was a slight slow down in the industry.


Another story on the  fallacy of cash flow:  several years ago while working with a friend of mine building spec housing in the middle of a project he had truck trouble and needed to purchase another one. He didn’t take a salary or wage during construction, his money was made when the house sold.


He did not have enough savings to make the purchase and required a loan, he went to several local banks and was turned down because he had no cash flow even though he had plenty of collateral the bank wanted cash flow as if that was a guarantee the money could be paid back.


And we wonder why there are problems in the banking industry, if I were lending I would want collateral that could be turned into cash, how about you?


Where you going with this Don? As always I just want to provide a little food for thought and maybe jar something inside that may help you get to where you’re going. Just because you have some cash flowing do not assume you are making a profit, keep a close eye on your expenses.
 


Here to Learn, Grow and Profit

© 7-7-2015 Don Sabelhaus


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