While sales revenue generates cash inflow, it’s not “free” cash until all associated expenses are paid, leaving the remaining profit for the owner to use for personal income, reinvestment, or debt reduction.

Primary Implication

Failure to collect more cash from gross revenue after paying ALL expenses means you own a money-losing business. Whenever there is less cash flow in from a gross sale than there is out for that sale, you not only lose cash flow, you suffer profit losses.

Overview

A dollar of sales collected does represent cash inflow, but it does not represent “free” cash to spend until the money spent to generate the sale is paid. The amount of cash collected from Net Sales after paying ALL expenses represents your profit.

Too many small business owners doing business on payment terms lose sight of this when a big, long-awaited payment is received. They see the improved bank account balance and think they have more breathing room. They forget that most of that collected Accounts Receivable are already committed to paying past-due Accounts Payable or paying down credit cards to cover the timing difference between getting paid and paying out.

“Free” cash to spend at the owners’ discretion doesn’t exist until all the expenses associated with each sale plus that sales allocated overhead is paid. After these costs are paid, what’s left over is money the owner gets to either pay themselves with, reinvest in the business, or pay down debt.

The combination of Planning for Profits and Cash Management is how you protect yourself from misapplying a cash collections windfall. Those that consistently do both are the ones who make more money—those who don’t are the ones always wondering why they never have any cash.