Why do you run out of cash even when you are profitable? | Anti-Spirituality #18

Your financial statements show a profit. Yet, when the end of the month comes, you run out of cash.
The reason for this is that profit and cash are two different things.

First, let's talk about something that is often overlooked.
A company can go bankrupt even when it is making a profit.
This is called bankruptcy while in the black. Even if the financial statements show a profit,
if you run out of cash on hand, you cannot make payments.
In the manufacturing industry, this is by no means a rare occurrence.

Why do profit and cash diverge?
The reason is that profit is calculated based on "accrual," while
money moves based on "transaction."
When you sell a product, sales are recorded at that moment,
and profit is calculated. However, the payment for that
might not actually be deposited for several months.

On the other hand, material costs and outsourcing expenses
must be paid in advance.
Money goes out first, and money comes in later.
This time lag is the true cause of running out of cash even when profitable.

In the manufacturing industry in particular, this time lag tends to be large.
You purchase materials, process them, hold them as inventory,
deliver them, wait for inspection, and finally receive payment.

During that entire time, the money remains
trapped within the product.
The busier you are with increased orders,
the more money goes out in advance, which actually makes cash flow tighter.
This is what is happening when you say, "I'm busy, but I have no money."

◤ The day a president lamented, "Why is it so hard even though we are in the black?"

At one company, there was a president who was chased by
monthly cash flow issues despite being in the black.
He said, "We should be making money, so why is it so difficult?"
I set aside the talk of profit for a moment and
laid out the timing of money going out and coming in
on a single timeline.

When laid out, the answer was clear.
From the payment of material costs to the receipt of product payments,
there was an average gap of over three months.
The company had been covering three months' worth of operating funds the whole time.
Every time orders increased, this advance payment grew.
That is why the more they sold, the harder it became.

The president was only looking at the "result figure" of profit.
He could not see the "flow of time" in which money moves.
Only after laying it out did he truly understand the cause of the hardship.

Many business owners say, "I leave cash flow to the accounting department."
However, understanding the structure where money goes out before it comes in
is the job of the business owner themselves.

This is not a matter of accounting procedures, but a management decision
on how to design the business.

There are countermeasures.
Can you speed up the payment cycle?
Can you extend the payment cycle?
Can you shorten the period you hold inventory?
Shrink the time lag one by one.

Before increasing profit, organize the structure so that money circulates.
This is the design to avoid bankruptcy while in the black.
To go a step further, get into the habit of looking at
"how much will I have to advance until payment is received"
at the order stage. The larger the order, the larger the advance payment.

A large order you accepted with joy can sometimes
tighten your cash flow.
You can only judge whether an order is good or bad by looking not just at the size of the sales,
but also at the time it takes for the money to return.

To be honest, when I was at a large company, I myself
thought, "As long as there is profit, it's fine."
I believed somewhere that
profit and money were the same thing.
In short, "I was in the abundant cash flow of a large company and
could not realize the fear of it."

However, as I faced cash flow issues in the field,
I felt it keenly.
"Profit is an opinion, cash is a fact".

No matter how impressive the profit on the books is,
if the cash on hand runs out, the company stops.
So first, look at the flow of money on a timeline. The talk of profit comes after that.

✓ One step you can take today
・Investigate how many days there are between the "payment date for material costs" and the "deposit date for product payments" for major transactions.
・Calculate how much the operating funds you need to advance will increase when orders double.
Episode 17


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https://note.com/human_crab7218/n/n3d75be6208d3