I just read an excellent blog on an accounting software website, and I am going to reproduce it full this week because it is just sooooo good…
She talks about patterns and how a 12-year-old Canadian boy discovered a Mayan city, never known, from studying star patterns in his bedroom using Google Earth.
What does that have to do with accounting? Patterns.
There are patterns or inter-relationships in your numbers that tell a story. And the challenge is that so many business owners get fixated on a small corner of the pattern in their numbers. It would be like trying to take in the beauty of a Mexican tapestry by studying the hem.
Profit is what most business owners get fixated on. Yet profit is just what is leftover after you deduct all your expenses from sales. You cannot go to the bank and deposit (and withdraw) your profit.
You need to know the pattern between your sales, profit and cash-flow. The excellent point this writer makes is that it makes zero sense to double sales if the overall percentage of cash-flow does not change.
In fact, you’ve just created a bigger problem. The underlying factors in your cash-flow must be understood, changed if you can, and managed.
The underlying dynamics of cash-flow are the speed that you convert accounts receivable to cash, the time you take to pay your accounts payable, and if you have inventory the conversion time to sell your goods.
I have clients who want us to defer expenses by capitalizing them. This improves profit – in the short-term – yet cash-flow is identical. Identical. And later, those deferred charges must be taken back onto the Profit & Loss Statement, lowering future profits. It is a zero-sum game of optics only.
Here is the link to that awesome blog in its entirety:
Thanks for reading…