31, Jan 2013
Improving Small Business Cash Flow with Direct Payment Solutions
Profit and Cash Flow
It is a basic principle of business that to survive, a company must make a profit. However, any small business person will quickly tell you that profit isn’t enough. Having adequate cash flow is essential to day-to-day survival of any small business. Understanding the difference between profit and cash flow is critical to small business management. Many businesses don’t succeed because of the failure to learn this lesson.
Profit is the difference between all the revenue a company generates and all the expenses it pays out. It is here where we note that profit is not cash. Assume a business sells $10,000 of product on terms of 60 days to a customer. And assume the company makes $5,000 on that sale. That sounds like a nice profit, and it is. The problem comes in timing when that profit is actually cash in the bank. The business selling the product has to pay its employees, the bills for the raw materials, and all its other expenses. Those have to be paid before the 60 days are up. When this is repeated for a number of customers, a real cash flow crunch can occur. If all the profits are sitting in the hands of customers who haven’t paid their bills, a company can fail.
The Advantage of Direct Payment Solutions.
Many small businesses today are rapidly turning to direct payment solutions. This is especially the case for companies that sell on the Internet. With direct payment solutions, a company receives cash from a sell immediately. There is sometimes a hold of a few days in the process. Even with a hold, the company knows the cash for the sale is on its way. This eliminates the days of waiting for weeks and months and then being told, “The check is in the mail.” Direct payments allow a much closer connection between profits and cash flow.