The Importance of Placing Cash Flow First
Your income and revenue are simply pieces of a larger puzzle.
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Krzysztof 'Kris' Garlewicz is President of ProsperiFi,
Profit can be tricky. On the surface, profit is fairly straightforward: earn revenue, pay expenses, then sit back and count the rest. In practice, things become much more complicated. For years, the popular mindset has advocated placing profit last, reinvesting remaining revenue after meeting financial obligations. In more recent times, some are flipping the traditional script on its head. Placing profit first, some entrepreneurs are finding creative solutions for postponing debt as a means for feeding growth. The trouble is, both these groups are forgetting a thorny secret about profits. Disguised as a path to financial security, profits often threaten to cause more problems than they solve.
Consistently reinvesting profits, regardless of the point at which they've been harvested, can often lead to disaster. As difficult as this may sound, I want you to throw profit out the window for a moment. To develop a strong foundation for business growth and sustainability, start by placing cash flow first. Cash flow tracks more than income and expenses. Develop a cash-flow-first mindset and create a launchpad for growth unlike anything possible with a profit-based mindset. Profit is the result of subtracting income from expenses; cash flow is a tool for accomplishing much more.
There's more to fueling growth than blind reinvestment. The costs for growth tend to fill the budget allotted for them -- regardless of how large of a budget you set aside. Developing a cash flow record collects all business financial activities together for better management. A cash flow mindset goes beyond tracking income, expenses and reinvesting the rest. Placing cash flow first takes a broader view of finances, encompassing debt and asset management and accounting for additional cash on hand.
Debt is dangerous. Entrepreneurs lacking capital may be unable to take advantage of opportunities without incurring debt and expensive interest payments. Business owners may be unable to take on more debt even if they wished, due to limits on credit. A debt emergency can threaten to destroy even healthy and successful companies. Relying too heavily on debt can put you on precarious footing. Debtors can make upper-echelon decisions that cripple small enterprises. Placing an emphasis on cash flow can remove the shackles of debt; it can also help broaden the scope for intelligent reinvestment.
It's still possible to reinvest into your business with a cash flow mindset. It's also possible to do much more than that. A cash-flow mindset not only places growth at a high priority, it also places sustainability and buying power high up on the list as well. Before reinvesting profits back into the business, creating potentially more to manage, consider solving existing problems first. Put the brakes on growth long enough to create liquid capital for paying off debt or for paying the balance on vendor invoices early. Reduce your debt and take advantage of early-payment discounts to contribute to your cash reserves through savings on interest.
Business owners focused on cash flow may be able to create additional revenue by putting their profits to work harder. Intelligent investing can help you gain respectable returns you otherwise wouldn't receive through a typical business checking or savings account. Liquid capital can enable you to change the scope of your enterprise, expanding to serve your competitors or by entering new markets.
A cash flow mindset is a long-term view of business finances. Your possibility will depend on your business, industry, current cash flow and your ambition. Before attempting to expand or trying to do more with your cash flow, make sure your business is financially fit. Get your finances in order before taking on added responsibility. Delegate the tasks you're able to and create autonomous processes for any task performed more than once. While it may not always be the right time to physically grow as a business, there's always room for some form of expansion.
Place cash flow first and start taking an active role managing your business' financial future. There are more ways your business can generate revenue than just making a sale. Attitude is everything. Developing the right habits today can help elevate your business tomorrow. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Krzysztof 'Kris' Garlewicz is President of ProsperiFi, designing custom wealth strategies for high performing entrepreneurs and executives. Your Wealth. Planned Wisely.
BY Thomas Koulopoulos