Why is Time Money?

​Every week, I speak with business owners who ask me pretty much the same thing:
"Ted, we have a pile of money coming in all the time... so why does it feel like we're always broke?"

Fair question.   
My answer surprises a lot of people…
“It’s not how much comes in that matters… It’s when”
Time is actually more critical to your success... and your survival than money is.
If your collections are out of alignment with your payables... You will experience Cash Poverty.

And that's when even sharp business owners get forced into making the mistake of borrowing funds to "catch up" on bills which is virtually always a deadly slippery slope.

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Example:
You sell a project for a price you know will create a profit. Then you complete the job and everything went well and without any major problems. Great. You made the profit you were expecting!… On “paper” that is.

Your financials, specifically your Profit & Loss statement is that “paper” because it measures among other things, profitability.  So to the naked eye, it appears the project was close to perfect...

But there’s an invisible problem… Profit doesn’t pay your bills or your payroll or anything else for that matter. That’s why I wrote that goofy post a few weeks ago that asked, “Can I Take My P&L to Publix?”

Here’s what really happened…
Imagine you finished a $100,000 project. A project that you know cost you $90,000 to complete, which will leave you a profit of $10,000 or 10% net operating profit (NOP). Nice.
 
Your bookkeeper posted the sale in QuickBooks along with all the  invoices you paid related to materials for that project, the payroll for the people who did the work and in the background and QuickBooks also kept track of your normal business expenses during the timeframe that project was in progress. Things like office staff payroll, your paychecks, equipment payments, fuel, insurance, insurance and insurance payments…
And now that the job is complete, if you opened the “reports” section in QuickBooks and looked at the P&L for the project, it supports that expected profit.    So far so good.
 
Except, your customer won't pay for another 45 days.

• Meanwhile, you've already paid for payroll.
• You've already paid for most of the materials.
• You've bought fuel.
• You've repaired equipment.
• You've paid insurance.
• You've paid payroll taxes.
• You've written checks for rent and utilities.

So you made money... on paper. However, in reality...
You don't have enough cash to comfortably get through the month.
 
I've watched profitable companies close their doors for one simple reason:
They ran out of cash before they ran out of work.
That's why I tell every business owner this:

Cash, not profit is the oxygen that keeps your business alive.
Profit is the score. But even when the Buc’s win a game on Sunday, the players still need their paychecks… their cash... if they want to stop at Publix on the way home to buy the kids Popcorn Chicken.
Now, you can survive a while without making a profit.
But you cannot survive very long without cash.
That's why successful owners don't just ask:
"How much did we take in this week or even how much profit did we make?"
They ask:
"How much cash will be in the bank on Friday?"

That one question changes everything.

The important distinction between those questions is the word “Friday”. Because a day is a unit that measures time. And time is a measure of speed....
The principle is, profit without speed is as dangerous as no profit at all…   because it can have the same effect on your business.

Get your financial brain focused on time...
What we want to be looking for is not just payments… it’s Payment Velocity. That is how you keep yourself from feeling like you’re broke all the time. And Payment Velocity is something that must be discussed before the project is started and monitored all the way through it.

Additionally, you must have a process in place that deals with slow payers... and there must be someone in your office who is trained and well suited to handle those situations. That person is worth their weight in gold... literally.
 
Of course, you can still come up short on a Friday afternoon if you have a customer who simply doesn't pay on time at the last minute. So it’s actually not enough to know what’s going to be left in the bank on Friday this week...
 
You’ll want to know the answer to that question six or eight weeks in advance, so you’ll have time to adjust if someone pays late.
If you wait until Thursday afternoon...   You're out of options.
That’s why it’s critical to have a cash forecasting tool to keep you ahead of trouble.
We’ll get into that next week.

So, until next Friday... keep your eye on the cash.
Or even better...
Remember... profit is important. Cash is essential. See you next Friday.
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