The Profit Struggle – One Man’s Journey

Last week John called and wanted me to help him develop a 12 month forecast (profit and loss, balance sheet and cash flow) that his bank was demanding from him. John was a God fearing man, worked over 70 hours a week managing his company and the 30 employees that worked for him. His company had not made a profit last year (doesn’t anybody read the papers? It’s tough out there) and yes cash was tight; but he was still in business, making his payments on time, meeting the needs of his customers and making payroll.

John said that since late last fall, his banker has been very concerned about his company’s ability to make a profit by year end and now, since he hadn’t, his banker was demanding more information on a more frequent basis. John didn’t understand what all of the fuss was about. The company was not profitable and probably wouldn’t be profitable until the economy turn around. John had been through these down turns before and always came out of them, what made this one different?

The story behind the story. What John didn’t realize was his banker had been reviewing the company’s financial statements for the last 9 months and it shows that although the company had met payroll, payroll taxes and bank payments, it was getting further and further behind with its payments to its vendors. The company lost $400,000 last year and accounts payable had increased $490,000 in the same period. The vendors had paid for the $400,000 in losses and also picked up the $90,000 in principal payments the company had paid down on their term debt.

So why was the banker so concerned about the company’s ability to make a profit and John wasn’t so concerned.

John had not understood that profitability (one of the key elements of cash flow) is the grease that keeps the business running. John feels that if he has enough determination, worked hard enough and is committed to his business, everything will work out.
John’s banker was more in tune with the financial viability of the company than John is. This is a bad sign – that your banker knows more about the internal financial workings of the company than the owner does. The banker is trained to glean minuet pieces of key information from the financial data. John doesn’t have the background or experience to understand his financial data like his banker does.
John was relying more on the past than on the future. John had been through these down turns before, they always came back and he always made it through them. Except this time, he is more leveraged than the last down turn and this time it is taking much longer for the economy to turn around than any of the previous 20 years John has managed the company.

In this case, the banker was right to point out to John his concern about the company’s profitability. Here are six (6) reasons why business owners need to keep their focus on profitability: Profit is the primary ingredient in cash flow (EBIDTA). It is the “E” in EBIDTA :Cash flow generated from the business is what pays debt service on term debt: vehicles, equipment, real estate, etc. Want to be debt free – profit is the only thing that will get you there.

Profit is what builds equity. Growth in equity is what enables the company to grow. Revenue growth creates an expansion in assets which forces an increase in the other side of the balance sheet Liabilities and Equity, Liabilities expansion has limitations based on that relationship with Equity. Want to grow your business, equity has to grow and profit is the biggest contributor to equity.

Profit is one of the primary elements in value. Profit has a 3 to 8 times multiplier, which adds directly to value and is the biggest contributor to a company’s value. Thinking of exiting soon – profit will make you the most take home money.

Profit builds working capital which enables the company to pay bills in a timely manner and take discount.

Profit is one of the primary elements that support additional term and working capital debt. Want to grow your business and need financing, increase your profits and financing is sure to follow.

Profit aren’t everything, they are the only thing. Profits are critically important to every business. John won’t be around long if he doesn’t take the steps he needs to get his company showing a profit. His vendors are going to clamp down on allowing him purchase materials on credit. Then the pendulum will swing the other way, COD. No 30, 60 or 90 days to pay, it is pay in advance. That really puts a crimp in cash flow.

Much of what I do with clients revolves around these concepts in some way. While I have always preached how critical it is to set goals and march toward them, being a sounding board, confidant, and accountability partner is just as important. If you need help in any of these areas, please contact me today!

This entry was posted on Friday, April 2nd, 2010 at 8:10 am and is filed under Business Financing, Cash flow. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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