Profit does not equal cash flow. Reading your profit and loss statement (P&L) will not give you a handle on your cash flow. Knowing whether you earned a profit (or created a loss) is not the same as knowing what happened to your cash, Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash.
That is why bad debt can really hurt you. Small start up companies are so excited to get into business they forget about credit when they sell to stores. Many do not have credit agencies on retainer so they cannot check credit ratings. A good idea is to take credit cards from your accounts and then charge the credit card when you are ready to ship. Small stores are utilizing this method more and more. Since many credit companies are not extending credit to small stores they find it easier to pay this way. The stores get points on their credit cards for the purchase which is a plus.
As your company grows you can hire a Factor. Factoring is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company, also known as a “factor.” This is done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Your company than pays a percentage of the invoice till the customer pays.
There is a direct link between low profits or losses and cash flow problems. Remember – most loss-making businesses eventually run out of cash. While this sounds like a no brainer keeping track of your profitability is so important. You need to continually manage this so that there are no surprises at the end of the year.
Look for part 4 in the series.
Maria Pesin knows fashion, especially the business side of the fashion industry. Do you know how Manolo Blahnik got his start in the industry? How he leveraged a paltry 3 grand into one of the world’s most famous luxury brands? While she doesn’t take credit for Manolo’s success, Maria has walked a similar path on numerous occasions. The world of fashion is not silicon valley, and it has nothing to do with Madison Avenue marketing. In this industry there is ALWAYS room for something new and exciting, but you have to have your ducks in a row. If that’s what you need, believe me, Maria is the General Patton of fashion ducks!
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