Why Cash, Not Profit is King

by | Oct 18, 2017 | Financial, SBDC

Jim Herrin, Director

Salt Lake Small Business Development Center

Who can forget or has not heard of the Enron scandal at the beginning of this millennium?  Enron was the “darling” of Wall Street and many investors were making lots of moolah. Their stock was trading at 55 times its earnings at the beginning of 2001.  The big banks and analysts had bleary-eyed love of this “golden goose” for a number of years. The revenues and earnings were terrific; always meeting or exceeding estimates.  And the share price kept going up, up, up…until…

March 5, 2001. A Fortune magazine columnist, Bethany McClean, asked a question that would be the push that started the Enron house of cards crumbling.  The question and article’s title: “Is Enron Overpriced?”  

Why did she ask that questions when no other analyst nor expert had anything but glowing praise for Enron?  It’s because she looked into their cash flow, which she described as “erratic”. 

Discovering the reason for the erratic cash flow uncovered a scandal that resulted in the largest bankruptcy in American history at the time, led to thousands losing jobs and all their savings or retirement, caused Arthur Andersen to fold, and caused Pacific Gas and Electric (California’s then largest utility company), to also go bankrupt because of Enron’s unethical practices that caused the rolling California blackouts, and Enron executives went to jail for a long time.  All this because the “smart people” on Wall Street were too busy or too enamored to look past revenues and earnings and “Ask Why?”, which ironically was Enron’s slogan.

There’s an adage that goes, “Revenues are vanity, Profits are sanity, but Cash is reality”.

Why do companies go bankrupt?  They run out of cash.  Even fast growing, highly profitable companies can and do go bankrupt.  They focus more on the revenues and profits, but a cash issue can bring it all to a screeching halt. Revenue and profits do not correlate to cash most of the time.  Have you ever looked at your revenues and compared them to your bank balance, then wonder where all the cash went?  If you don’t know, then you are not managing your cash flow well.  If you think your CPA does all that, think again.  They bookkeep, do taxes and give you “historical” reports.  Cash flow needs to be managed going forward, not by discovering a past problem.  By then it might be too late.

Remember these few items:

  • Not all cash coming into the company are revenues
  • Not all cash going out of the company are expenses
  • Not all revenues are paid for in cash when the transaction occurs
  • Not all expenses incurred are paid for in cash when the transaction occurs
  • Problems occur when there is not enough cash coming into the company to offset the cash required to go out at any particular time.
  • Managing cash flow is about shortening your cash cycle.

The Salt Lake Small Business Development Center at the Salt Lake Community College on the Larry H. Miller Campus will be holding a Cash Flow is King Workshop on Tuesday, October 17, 2017, from 9:00am to 11:00am.  Come learn valuable methods you should be using to manage your cash flow and ease your financial stress. 

“…one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”  

-Chris Chocola  (Former Congressman and Business Professional)

Learn more about the many resources available to you at The Mill at SLCC! We’d love to see you here.

FinancialWhy Cash, Not Profit is King