May-June 2008   

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"Drive thy business or it will drive thee."
Benjamin Franklin

"Success in business requires training and discipline and hard work. But if you're not frightened by these things, the opportunities are just as great today as they ever were.”
David Rockefeller


"To succeed as a team is to hold all of the members accountable for their expertise."
Mitchell Caplan
"In the business world, the rearview mirror is always clearer than the windshield."
Warren Buffett



"It was the best presentation on this subject I've ever seen."   
-Harold Rousso


“This course has been a wake up call to me, to keep my eyes wide open as my company grows in the future.”
-Michael Evans




Cash Theories
by Laurie Owen

Do you remember high school geometry and all those conditional statements? The "if then, then therefore," logic strings? I bet you thought that you'd never use them again. You thought wrong! Here's one for you:

If sales do not necessarily equal profits, at least not in direct proportion, and
If profit does not necessarily equal cash, therefore
More sales do not necessarily equal more cash.

That doesn't sound very logical, does it? But each of these statements is especially true for a business that has a seasonal sales pattern, lots of inventory, and carries accounts receivable. 

Sales and Profits?
I think we'd all agree that in any business, there has to be some relationship between Sales and Net Profit, because to earn a profit, what do you first have to have? A sale! Generally, in most businesses as sales go up, profits go up; sales go down, profit goes down. It's a direct, but not proportionately direct relationship. Profits don't necessarily rise and fall in the same proportion as sales. For example, if you end up spending a lot of money on advertising and staff to drive higher sales, those added expenses can cut into your profits.

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"Money to Grow with Little to Low Down"

Friday, June 13

for Business Owners

Over 97% of the people attending our workshops say they've substantially increased their under- standing of the health, strengths and weaknesses of their companies. Change the way you manage your business, increase your cash flow, and find profits you never knew existed. 

Profit Mastery for Jewelers

Workshops & Plus Days
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Read/Print Brochure

Profit and Cash Flow?
For many business models, profit and cash are typically two different things. Profit is something you make on a piece of paper (your Profit and Loss statement or P&L); cash flow is what you have on your Balance Sheet. We measure profit on the P&L by matching the expenses incurred to the sales the expenses helped produce—using the accrual method of accounting. But the P&L tells us very little about cash flow. We measure cash on a Cash Flow worksheet, using the cash basis of accounting — which tells us very little about Profit. 

Sales and Cash?
Because of seasonal sales patterns in some businesses, there can actually be an inverse relationship between sale and cash: as sales go up, cash goes down; as sales go down, cash goes up. Here's why:

In your typical jewelry store, as your sales go up, you're buying ever increasing amounts of inventory to support rising sales, and in some cases, creating ever increasing accounts receivable. At just about any point in time, as sales rise, you are investing cash into new assets (inventory and A/R) at a greater rate than you're collecting cash from prior or current sales. 

Cash is going out faster than it's coming in, causing a financial gap (the difference between the cash you've got, and the cash you need) to occur, which leads to increasing needs for short term debt to fill the gaps.

As sales go down, you are collecting cash from prior credit sales and current cash sales at a greater rate than you're reinvesting cash back into new inventory and A/R. Cash now is coming in faster than it's going out, resulting in cash surpluses, which allows you to repay short term debt.

This is a classic example of a seasonal business. The company's sales are causing cash to either rise or fall depending on which direction sales are going. 

To further illustrate this point, can a company have:
   Positive Profit and Negative Cash? Yes
   Negative Profit and Positive Cash? Yes
   Negative Profit and Negative Cash? Yes
   Positive Profit and Positive Cash? Yeah – and what a great thing that is!

If you'd like your business in the last category, watch your cash, manage more efficiently, and set up credit lines before you need them to handle seasonal cash needs. Invest some time creating a Profit Plan (projected P&L) and a Cash Budget (projected cash flow) so you can measure and predict cash flow and profits. What gets measured tends to get managed better. Sounds logical enough, doesn't it?

For some simple (and free) worksheets in Word and Excel,
visit the toolkit section of our website.  


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