cash flow

One of the biggest financial mistakes many small business owners make is focusing too heavily on profitability at the expense of cash flow. There’s an old saying that sums it up well: “Profit is Queen, but cash is King.”

This is especially true in the post-financial-crisis world that continues to linger, with economic growth remaining tepid and most banks still reluctant to loosen the purse strings. Unfortunately, many small businesses that were enjoying record profits, at least on paper, back before the financial crisis hit didn’t have sufficient cash flow to see them through the downturn.

Business growth and profitability. Most entrepreneurs would consider these to be the Holy Grail of business ownership. So it’s not too surprising that many participants in the financial workshops I lead are surprised when I tell them that instant profits and rapid business growth aren’t always a cause for celebration.

“How can this be?” you might be wondering. The best way to explain it is to tell the story of the Wonder Widget Company. Haven’t heard of them? Well, this is a fictitious company I made up to help me explain business financial concepts in an easy-to-understand way.

Many business owners anxiously wait by their mailbox each day to find out how they can conduct that day’s business. If much-anticipated checks arrive, that’s great—they can pay suppliers, meet payroll and tax obligations and perhaps take advantage of growth opportunities. If they don’t arrive, it may mean another sleepless night, wondering when all those checks that are “in the mail” will actually materialize.