Key for entrepreneur’s survival in early years: Cash Flow vs profit

by Ashvini on August 15, 2011 · 10 comments

in Entrepreneurship

Often an entrepreneur is worried about when his or her venture will become profitable. Profit is what a person /firm receives when all the expenses related to procurement of goods , admin expenses and taxes have been added and then deducted from the amount that has been accumulated by selling manufactured goods at a certain price.

Cash Flow, entrepreneur, profits

This

Profit  = Sales –( All expenses including administration, procurement and taxes).

Though it is desirable to become profitable that is positive result on the left hand side of above equation, it is often very difficult for an entrepreneur to achieve that.

Why ?

An entrepreneurial venture is very small so as to generate high levels of sales. The expenses most of the time though are huge and tend to drag the profits down for years. Thus for a few years sales are almost negligible while expenses tend to rise with time. It will be a few years before sales will actually start catching up the expenses.

Does this mean entrepreneur should not worry about getting profitable soon? No but the focus should be more on keeping the venture alive and using the cash flow to generate more assets and funds for future expansion.

As much as we like to see some profits generated by our venture, it is a good idea to keep them on the back-burner. A start-up like any other investment avenue ( such as Fixed Deposits or stock market ) is a long term investment. It is not just possible to someone to say invest a million dollar today in stock market and reap ten millions dollars the next day. If someone does , it may be an anomaly and not the thing that can be repeated as a process.

A business like stock market will require heavy investment in its early days without regards to how much profit it is generating.

Instead the entrepreneur needs to focus on being cash flow positive. His or her venture is like an athlete running very fast to compete and this needs a lot of glucose to sustain. Cash flow means the difference between money that you are making / have / likely to gain and money that you are expending/going out as interest .

Thus you achieve positive cash flow when you know that you have enough cash to survive for example in the next month or for the next year. The moment you run out of cash your venture is in trouble. Now you may take sufficient loans/credits to cover cash problem but that is not a permanent solution.

Cash flow = Money that flows in ( from your own fund, earnings, investment) – Money that goes out ( because of expenses, taxes, liabilities , interests etc.)

The remarkable thing is that even though you are profitable , your venture may collapse because it did not do well to manage the cash flow and remain positive on that.

A small business or an entrepreneur must be more conscious and worried about the cash that it is going to need to run its business.

Now with this knowledge, we can easily determine the ways in which we can remain cash positive. We can either increase our earnings, get credit , add more from savings or reduce expenses by for example moving to a less costlier location.

Thus an entrepreneur needs to concentrate more on cash flow that becoming profitable for a long period of time. Even if the venture becomes profitable even then it should be reinvested to expand operations,to reduce interest outgo, create new products.

Now its your turn :Even though you are running a micro business/blog/ecommerce site, are you more concerned about profit or being cash flow positive?

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{ 8 comments }

Edward Villanueva December 28, 2012 at 11:05 am

For a business to be successful, an ideal situation is to have adequate cash balances as well as healthy profit figures.

Veronica Cervera@miami florida real estate October 9, 2011 at 11:16 pm

I think one will have to study if whether or not they are in a good business. Not by the profits one is generating at the current time, but the potential of it. Say, can you see the business grow in 20 years? If the answer is yes, then most likely, you are in a good business. Time is the enemy of a bad business and a friend of a good business. In other words, it’s not advisable to fold your business as early as you can if you know the financials and the potential tell you that you’re in a bad business.

Rohit Batra August 22, 2011 at 7:21 pm

Excellent post Ashvini.. Quite a good tip to maintain the cash flow in a business to survive.. I am not much a entrepreneur but this tip is really genuine as in any category of business you need to have positive cash flow to keep your business wheels rolling because once they stop then you will have to start from scratch again and that is not worth it sometimes..

Ashvini Kumar Saxena August 24, 2011 at 5:42 pm

Hi Rohit,
Glad that you liked the post.
Even in personal life, one should have a great cash flow. A person or a company who lives on too much debt will find themselves in difficulty once there are not many favorable conditions. My philosophy is to take debt only when it does not hurt much and is easier to pay.
Keep coming bro and thanks for comment :)

Mouh August 18, 2011 at 8:46 pm

Cash flow is something I am very conscious about. Having a positive cash flow is of paramount importance. I know someone who started an offline business and spent a lot of money. Great and expensive location, cars, beautiful desks, etc. She didn’t succeed and lost a lot. What a pity…

Start small and grow bigger is my motto. :)

Ashvini Kumar Saxena August 24, 2011 at 5:44 pm

Hi Mouh,

Yes!!!! You have an example to vouch for that cash flow is extremely important. A small entrepreneur thus should worry a lot about how he is going to earn that cash to pay his bills.

Your motto is superb.
Thanks for your comment bro :)

Aswani August 16, 2011 at 6:24 pm

Great post Ashvini. Honestly, I have never been in such situation till date but I have seen people facing such situations. I agree with you on the fact that an entrepreneur needs to maintain a positive cash flow in order to keep running his business healthy/profitable and infact, it becomes more important if there any future plans for expansion.

Ashvini Kumar Saxena August 24, 2011 at 5:46 pm

Hey Aswani,

I was in such a position once, in credit card debt. It was tough to come out. Once I decided to come out of it , I never went back. I prefer to delay my purchase if I know I dont have the capacity to repay. I rarely have trouble with cash flow. Be it business or personal finance, cash is the king :)

Thanks for dropping by and commenting :)

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