Maximize Profit and Cash Flow (Financial Priority Formula Part 2)
Sep 20, 2024In our latest podcast episode titled "Maximize Profit and Cash Flow (Financial Priority Formula Part 2)," Shannon continued to unravel her seven-part Financial Priority Formula, focusing on operating profit and cash flow.
For those new to Shannon, she’s a seasoned CPA and business owner dedicated to simplifying money matters and empowering others. In this episode, Shannon began by reaffirming the importance of gross margin, which determines if you're selling your product for more than it costs to produce. However, after ensuring a healthy gross margin, the next step is to focus on operating profit.
Operating profit, Shannon explained, is about whether your business is making more than it spends on operating expenses. It considers all costs related to running your business—from salaries and rent to software subscriptions and utilities. If your business isn’t producing a positive operating profit, it’s a red flag. According to Shannon, "you’re treating those ancillary expenses, maybe elective spending, maybe some overhead," to get back on track.
Next, Shannon dove into the complexities of cash flow, stressing that it often gets confused with operating profit but is fundamentally different. While operating profit focuses on the costs of running your business, cash flow encompasses all money entering and leaving your business. Shannon likened cash flow to your "money metabolism"—how quickly money moves in and out.
Poor cash flow can cripple even the most profitable businesses. If your bills are due before customer payments come in, you might face a cash crunch. Positive cash flow ensures you can pay bills on time, invest in new opportunities, and build a cash reserve. Shannon broke cash flow into three parts: operating cash flow, investing cash flow, and financing cash flow. Operating cash flow is closely related to operating profit but considers more factors. Investing cash flow and financing cash flow include activities like taking out loans or making large equipment purchases.
Shannon emphasized that timing is everything in cash flow management. "People overlook cash flow as they focus on profitability, and sometimes that’s not the right answer," she said. Timing issues can often cause cash flow problems—like paying off credit cards too soon or not collecting customer payments swiftly. Practical tips for improving cash flow include offering incentives for early customer payments and regularly reviewing cash flow statements to spot potential issues.
Shannon noted that cash flow issues often prompt business owners to seek professional help. "Most people need to take a timeout, pause, and give us a call and do a power session," she advised. These sessions can help diagnose and treat the root causes of cash flow problems.
Operating profit and cash flow are pivotal components of Shannon’s Financial Priority Formula, but they are just a part of the broader picture. Shannon plans to delve into more metrics in future episodes, providing a comprehensive roadmap to financial health.
If you found these concepts challenging, don’t hesitate to reach out for help. Shannon is committed to untangling financial knots and empowering entrepreneurs to take control of their business finances. Stay tuned for more insights, and as always, keep what you earn!
What you'll hear in this episode:
03:31 Gross profit crucial before evaluating operating profit.
07:11 Profitability and cash flow are crucial.
10:03 Improve cash flow by timing changes & incentives.
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
