Cash and profit are not interchangeable, said Fred Parrish, CEO of The Profit Experts. He has worked 37 years in finance in everything from startups to multi-billion-dollar companies and said since companies can’t actually “spend” profits, they must have sufficient cash available to fund operations until conversion occurs. Parrish shared why generating cash is the most important aspect of profit management, and why converting profit into cash in the shortest possible time should be a goal of every organization:
Principle 1: Cash is the Lifeblood of Your Business. Since there is nothing tangible returned by profit alone, the logical conclusion is that without cash conversion there is no REAL profit.
Principle 2: Generating cash is the most important aspect of profit management and conversion of profit into cash in the shortest possible time frame should be a goal of every organization.
Principle 3: Profitability and cash flow are inextricably linked; you must have profits to produce cash and you must have cash to produce profits. The cycle cannot be broken indefinitely without seriously negative results. Even though it is possible to have a scenario where a company is operating at breakeven or with losses and also having a positive cash flow, it is a short-term condition that cannot be sustained indefinitely.
“Bottom line – there is no free lunch – there is cash required to purchase each item and it will have to come from somewhere (either from operations or other outside funding),” Parrish said. “Although the situation is somewhat fluid, the reality never changes; you must produce long-term profits to survive.”