Synopsis
Just because your business makes money (profitable) doesn't mean you always have enough cash on hand (cash-poor). The secret to avoiding this is managing how your cash flow, profits, and financial reports work together. This is the proven management system for increasing sales, profits, and cash reserves.
BusinessCPR™ shows you how to improve cash flow and profits through better reporting.
BusinessCPR™ or B-CPR is a proven system for managing the relationship between Cash flow, Profits, and Reporting. B-CPR shows you how to improve business cash flow from higher profits through better reporting. Failure to manage these three business essentials is why most businesses make less money than they should.
Business cash equates to the blood flowing through our bodies; profits equate to the heart pumping blood to vital organs and tissues; reporting effectively on all parts of business equates to how our nervous system sends and receives essential and timely messages.
Just as cash funds all of the vital actions across your business, the blood in each of us performs many crucial functions, from supplying the oxygen carried in red blood cells to our tissues to the supply of nutrients such as glucose, amino acids, and fatty acids processed by the digestive system and transported throughout our body. Similarly, cash flowing from business operations is how employees, suppliers, lenders, and the government get paid. Any money leftover forms profits, which can be given to investors as dividends or returned to the company to reinvest.
Becoming competent in B-CPR doesn’t require special certification, a business degree, or years of accounting experience. To practice B-CPR, you only need to know the relationships between your cash flow, profits, and financial reporting. Understanding these relationships is the best way to protect your business from needing to be revived. By consistently applying the following principles of B-CPR, you will have a profitable business with predictable cash flow to keep it healthy.
The “C” in B-CPR reflects how you manage the cash flowing through your business.
Your business may be profitable, but that doesn’t mean you have adequate cash in the bank. There’s a significant difference between profit and cash flow, one that most struggling business owners never fully comprehend. This is particularly true for business owners who struggle with recording their financial transactions into their accounting software.
Successful business owners know that every payment their business receives or makes needs to be recorded within the week. Without recording these transactions, you can never generate an accurate P&L Statement or Balance Sheet. Without an accurate and timely P&L Statement, you will never know if you make profits or suffer losses.
The most effective use of your P&L Statement is isolating areas where you are at the highest risk of losing money. By studying the direct cost and overhead areas relative to net sales achieved by your business, you can see where you are making money and where you are losing money.
If you really want to know the pulse of your business, you must be vigilant in tracking week-to-week performance; cash flow from operations is a more crucial weekly metric than profits.
There is a reason why our vehicles’ windshields are bigger than our rearview mirrors. No one would ever drive their vehicle forward, looking through the glass the size of their rearview mirror, at any speed.
The bottom-line profit or loss number in any P&L Statement is a lagging number. It reflects what has already happened in your business. It’s a very important number, just as your rearview mirror is an important part of safe vehicle operation, particularly when you want to see behind you.
Cash flow from operations is the lifeblood of every business, and it’s particularly vital to any business that lacks vast cash reserves.
When your business has cash available, you can pursue growth options, make investments, and draw from cash reserves (savings) for any unexpected situation or emergency that arises. What many failing business owners misunderstand is the hard reality that while your P&L Statement might show your business made a profit, your business can still fail whenever you don’t have enough cash to pay your current financial obligations. Cash flow problems are the leading cause of business failure.
The “P” in B-CPR comes down to your “Actual P” (profit results) versus your “Planned P” (profit targets)
Each year, as part of your profit planning for the coming year, you need to ask yourself a hard question: “Do your planned gross profit and operating (EBITDA) earnings suggest that your business can be successful in the long term?” If not, “What specifically needs to change during this profit planning cycle for your business to be successful?”
The next question is, “How will I influence these factors to make acceptable profits for the risk I incur?”
Never lose sight of the hard truth that business profitability in past years is no guarantee of profitability this year or next. Without a plan to direct and control your business, “How will you ever know if your business is profitable?” “How will you know if you’re earning enough to be worthy of your valuable time and investment?”
During your profit planning process, you must ask, “Is my business structured and staffed to allow it to operate without me?” If your answer is, “No, there is no way I will hit my profit plan numbers if I’m not 100 percent involved in the day-to-day operations of my business,” it’s a sure sign that you have multiple problems to address.
If this is the case, step back and ask yourself to press forward if you have it in you. “Are you committed to resolving your business’s daily issues and problems?” If the answer is “yes,” then B-CPR will help you move forward more confidently and cost-effectively. If the answer is “no,” you have a problem not addressed on this website, and you’ll have to seek answers elsewhere.
The “R” in B-CPR is ultimately about managing profitability, using the right reports.
Successful business owners value the importance of keeping well-organized financial records. They use accounting software like QuickBooks or Sage to know if all of their customers have paid them. They also use accounting software to track expenses, monies owed, and payment deadlines. They do this to know whether they are making or losing money.
In contrast, running a small business out of your checkbook is not an acceptable management system. It means continually worrying about the money coming in and going out of the business solely through your bank account balance. Most business owners don’t take the time to record the transactions occurring through their business in their accounting software. As a result, they are limited in how they manage their business to what their bank account reports related to money coming in and out each time they check their bank balance.
Yes, small business owners who run their businesses out of their checkbooks do have a rough sense of whether they have enough money in the bank to pay any due bill. The problem is they have no good way to know what money their business receives from selling services or products to customers and who still owes them.
B-CPR Is anchored by accurate + timely record-keeping
The “P” for-profit in B-CPR comes after you have converted your sales into “C” for cash inflow and paid your expense transactions representing cash outflow and before the “R” for whether you did this at a profit or loss through your reporting.
Successful business owners keep daily-to-weekly sales, operations, and financial records, whereas struggling business owners often find record-keeping difficult to establish. Therefore, they never practice this key routine to making a business profit and controlling cash flow.
Effective record-keeping begins with recognizing two key factors: First, no game is fun to play overtime when no one keeps score. Part of the fun of playing any game is knowing whether you are winning or losing (particularly when you know you are winning!) during the game. Second, if your goal is to enjoy the long-term financial benefits of operating a well-managed business, one that runs without you, you’ll first need to learn to keep consistent and accurate financial records.
Creating an income or profit and loss (P&L) statement is easy. It starts with recording your revenue and expense transactions into your accounting software every week. It’s amazing how many business owners fail to record both sales and expenses incurred promptly and consistently. Too often, they’ll try to do this at the end of a month, quarter, or never at all. All because they failed to develop the habit of timely and consistent record keeping.
As a result, they fail to record every transaction that occurs, each with one of two outcomes. Either the sales transaction led to more money coming into the business or more going out.
Business management is ultimately this simple: you realize a profit because of cash remaining after total costs are deducted from a sale, or you spend more than you sold it for.
After all the revenue and expense transactions have been recorded for the accounting period, you create an accurate profit and loss statement. This is why running your business from your checking account is a grave mistake. Calculating a realistic profit picture from your bank statement alone is impossible.
Your accounting system will easily create your income statement for you by adding up the entries from the revenue and expense records entered for a specific period, such as a week, month, quarter, or year. Your income statement will summarize sources of revenue and expenses. The ultimate purpose of your P&L Statement is to communicate whether your business is profitable or not during any chosen period by showing you:
Gross Sales
– Less discounts, returns, and sales write-off’s
= Net Sales
– Cost of Goods Sold (variable costs)
= Gross Profit
– Selling General & Administrative Expenses (fixed costs)
= Operating Income (EBITDA)
+ Other (non-operating) Income
– Other (extraordinary) Expenses
– Interest
– Taxes
– Depreciation and Amortization
= Net Profit (or loss)
As reflected above, you get to confirm where you are making or losing money by aggregating revenue and expense transactions into their appropriate accounting categories.
You may have dozens, hundreds, or thousands of entries from your various transactions over any accounting period. Recording each transaction into your accounting software automatically records the data into its appropriate chart of account in your general ledger. These recorded transactions are ultimately reflected in your P&L Statement, Balance Sheet, and Statement of Cash Flows. Remember, the “R” for reporting in CPR is foundational to making a profit with cash reserves in the bank.
The bookends of B-CPR are your weekly cash flow projections and monthly analysis of your financial statements
Cash flow refers to the timing and amount of the cash flowing in and out of your business. It’s important to differentiate the two types of cash flow:
- Positive cash flow occurs when the total amount of cash coming into your business during a specific period is higher than the total amount of money leaving your business during that same period. For your business to be viable, you must have a positive cash flow
- Negative cash flow occurs when the total amount of cash leaving your business during a specific period is higher than the amount of money coming into your business during that same time. Negative cash flow is always a risky and undesirable situation. Anytime you’re projecting negative cash flow, you need to immediately address what actions need to be taken to generate and protect cash before you begin to run a higher deficit. Often, difficult decisions must be made.
While the flow of money out of most businesses can be seen in a predictable pattern, rarely can the same be said for money coming into a business. As a result, it’s far too common for business owners to have some combination of the following cash flow challenges:
- The newness of the business or recent late payments makes it difficult to receive and pay on credit.
- Growth opportunities can reduce the amount of available cash.
- Unused or underutilized purchased inventory ties up cash.
- Customers who pay on credit will always delay the amount of incoming cash.
- Selling to other businesses at less than full price and on credit delays both incoming cash and the quality of that cash inflow.
- Uneven sales due to seasonality or other factors create peaks and valleys in available cash.
- Nonpayment by customers robs you of cash that then becomes bad debt.
- Unexpected expenses that force you to spend unplanned cash.
The bottom line of BusinessCPR™ is about converting cash from profits into sustainable cash reserves.
As you can see from the above list, you can’t just assume that positive cash flow and profitability will automatically happen for any business. Cash reserves are achieved through thoughtful profit planning and follow-through on key actions supported by accurate and timely reporting. Failure to utilize accurate reporting and make informed vital decisions will result in your business flatlining. If this happens, your business will need to be financially resuscitated because you didn’t apply the principles of
How are your management decisions impacting cash flow?
If your profits are shrinking and you struggle to hold onto cash, click here to take the “free” BusinessCPR™ Business Assessment to learn how your management decisions impact your profits and cash flow.
Upon completing the business assessment, you will receive a risk profile showing how at risk your business is to suffer cash flow and profit problems, the primary cause of business cardiac arrest over the next three years across ten money-making dimensions.
Are you tired of cash flow struggles?
If you have shrinking profits and struggle to hold onto cash, click the link below to take the “free” BusinessCPR™ Business Assessment to learn how your management decisions impact your profits and cash flow. Upon completing the business assessment, you will receive a risk profile showing how at risk your business is to suffer cash flow and profit problems, the primary cause of business cardiac arrest over the next three years across ten money-making dimensions.
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