Profit Isn't Cash

Last week we looked at why a 90 day plan needs numbers, and the three margins that tie them together. Here's what those numbers show that most owners can't see.

Here's an example from our demo company:

Profit over the next 3 months: $6,750

Cash tied up in unpaid invoices and stock: -$1,401

Debt payments: -$4,500

Profit says $6,750. The bank account grows by $849.

Most owners look at their business through the profit and loss. But working capital and loan repayments never show up there. They take cash out of the bank without touching profit.

The test before you start.

Start with the cash in the bank on day 1: $35,269. Add the profit, take off the working capital movement and the debt payments, and the maths says you'll finish the quarter with $36,118.

I call that number theoretical , because forecasts never play out exactly.

So you decide how much wiggle room to build in. Some plan on exactly that number. Others plan on less. In this example we've used $32,000, which leaves $4,118 of room for things to change. That figure feeds straight into your third margin, Cash Flow Margin.

How much room is enough?

I don't set that number. I ask.

But the third margin can't be judged on its own. You look at all three together, against their benchmarks: Customer Margin of 20%, Profit Margin of 10%, and working capital at 5% of annual sales.

In this example, Customer Margin is 16.9%, about 3 points below. Profit Margin is 5.6%, about 4 points below. The gap gets wider as you move down. Cash Flow Margin is 7.6%, which is above benchmark.

It's not a disaster. But it's a business that needs improving, and when profit is thin there's little to cushion a slow month, so the cash has to do more of the absorbing.

If an owner in that position wants to plan on exactly the theoretical number, I'll caution them.

The aim isn't to hand you a number. It's for you to see why the number matters, so you can choose it yourself.

With your room chosen, the test is simple. If your cash can absorb the working capital and the debt repayments, with the room you've chosen to spare, the plan is ok to go. That's true even for a growth plan that spends more on Product, People and Promotion and shows a loss for the quarter.

And if it can't?

You have options, because you found out on day 1:

Slow the plan down

Arrange more borrowing before you need it

Adjust the actions while there's still time to execute them

There's an old saying: go to the bank when you don't need the money. That's when you're in your best negotiating position. The owner who borrows on day 1 with a plan is in a different position from the one who borrows in week 10 with the account empty.

Most problems can be fixed with 90 days to work with. The owner with no plan finds out when the money runs short, and by then there's no time left to adapt.

Stop running on empty. Start building margin.

Check the cash before you start, not after.

That's the idea behind my book, 3 Months Forward: Stop Running on Empty. Start Building Margin. It's an Amazon best seller.

One reader told me that most business books she's read went over her head, but this one was simple and easy to understand.

Get it here (a quick sign-up on the way to Amazon): https://3mf.mykajabi.com/3mf-book

Cash is only half of running on empty. Next week: the other half.

Want hands-on help? Comment below or DM me.

#3MonthsForward #90DayPlan