Financial Management


Why cash is more important than profit

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What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business. 

In this series of articles and associated webinars and workshops, by Roland Hanekroot you will learn the basic concepts and get the knowledge you need to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’.


The format of each episode in the “First Steps” series is to explain the basics of the topic and then in line with the principles of New Perspectives business development programs, to suggest some small simple “First Steps” you can take straight away to put the knowledge into action.

Financial Management

profitIn the fourth of these articles we’ll look at the Financial Management and ask:

What do you need to know and how do you need to apply that knowledge to put your business on a solid financial footing?

3 Principles

There are 3 principles you need to understand to manage the finances of a business well:

1)    Why do we need to make profit?

2)    Profit and cash are not the same thing at all and they don’t even have a direct relationship between each other.

3)    Cash is what you must worry about all the time… not profit

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

The 3 Functions of Profit

Profit has 3 functions:

1)    To pay investors and stake holders in a business a return on their investment.

2)    To provide the business with funds to invest in itself to grow or develop the business.

3)    As the thing by which we measure how well we are doing in running the business.

The first function is straight forward, if someone invests $100 or an hour’s work into a venture, that person wants to see a return for that investment. That return can only be payed out of the profits of the business.

The second function is also straight forward, in that, if you want to buy a new machine or tool or vehicle for your business you need to have the money to pay for that. Profit is what provides that money. (You can borrow for that purchase of course, but then the purchase is effectively made out of future profits)

The third function is about this: How do we know if our business is going well or not so well? The simplest method to answer that question is to keep track of the financial numbers and profit is one of the most important of those.

Profit and Cash

The second principle about profit and cash is what brings a lot of small businesses unstuck. A large proportion of the businesses that make up the horrendous statistics on failures in small business do so because of a lack of understanding of this principle.

Profit is a simple sum (on paper) of sales minus costs. So if you sell stuff in a week for a $100 and it costs you $50 in raw materials that week and $25 in office costs, it means that you have made $25 profit that week.

river Cash (your bank balance) bears little relation to those numbers in most cases. The $100 of stuff you have sold might not be paid for that week or even that month. You also might have had to pay for the raw materials some time previously and your office costs (staff and rent etc) may have to be paid every Friday. So that at the end of the week your bank account will actually be significantly in the red even though you’ve made a profit.

Cash Flow

So cash needs to be calculated in a different and slightly more complicated manner than the simple profit and loss equation.

When thinking about cash it is useful to think in terms of flow… money flowing in and out of your account, like a river flowing into the sea. If it rains upstream in Queensland for example, it may take a month for the Darling River to start swelling downstream in South Australia. So when talking about cash we usually talk about cash flow…. Money flowing in and money flowing out. If more money flows into your bank account in a given period than flows out in that period, your bank account swells and vice versa.

Cash is the main thing

cat And that brings us to the third principle that you need to understand about financial management of the business.

I said that the thing to worry about in your business is Cash and not Profit. For most people this is a counterintuitive statement.

The truth of this principle is actually much more straight-forward than you might think, because:

Only cash can be used to pay for stuff

Theoretically, your business may never make a profit and yet survive, as long as you continue to have enough cash to pay the bills, your staff, your raw materials, the rent etc. Obviously without making a profit, the business will ultimately run out of cash, but that can take years in some circumstances. So as a business owner who is committed to put his business on a solid financial footing, Cash-flow must always be your first concern.

This is the topic we will be talking about at the March Small Business Masterminds ‘live’ workshop as well as the Masterminds online webinar, both on 13 March. If you would like to attend either the webinar or the workshop, go to 

Take the first steps:

As mentioned in the opening paragraphs of this article, I will suggest some “First Steps” actions you can take right away, that will get you started on implementing the topics and principles we discuss:

  1. Download the Article by Roland Hanekroot: “Cash-flow, the Basics”: follow this link
  2. The 7 Big Questions: How to make more money and generate more cash
  3. Have a look at a great blog post on the Times of London about the importance of profit in business: Follow this link
  4. 5 ways to improve your cashflow in INC magazine: Follow this link
  5. If you are not already doing so, start by paying yourself a regular “wage”. A weekly or monthly amount you can live on as a minimum, and record this wage in your books as an expense to the business. You may decide to invest this money back into the business if you don’t need it to live on, but by paying yourself such a wage you will gain a more accurate insight into the profitability of the business and you will start to see how much money you are actually investing into the business and therefore should get a “return” on in the future.
  6. Start a proper bookkeeping program (Xero, MYOB, Quickbooks, Saasu, Freshbooks) and ensure it gets kept up to date at least monthly.
  7. Ask your accountant or bookkeeper for a simple cashflow spreadsheet and either start to use it yourself monthly or ask your bookkeeper to do so for you, you’ll be surprised how easy it is to start to get a handle on the cash flowing in and out of your bank account.

About the author and the Masterminds sessions


Roland Hanekroot is a business coach who works with Small business owners to help them have more Fun in their businesses and build businesses that sustain them for years to come. Roland is also the author of “The Ten Truths books for Business owners” (more about the books here:

Every month Roland Hanekroot runs a business development workshop as well as a webinar called “The Small Business Masterminds” more information here and to register for the next webinar or workshop, follow this link: The first time is free.

The Seduction of the Hammer

1001 Business Bedtime stories… The seduction of the Hammer… Truth 1

Truth 10 about the Business owner
Your time and your braincells are the most valuable assets of your business

Here follows another one of the “1001 Business Bedtime Stories” … Every story comes straight from the New Perspectives Small Business Bootcamp, stories of business and courage and they illustrate an aspect of one of Ten Truths… You might recognise some of them from your own experience.

Once upon a time… a long long time ago in a country not unlike Australia… Andrew was a builder…

Andrew had started his career in the building industry the same way many builders get their start, by doing a carpentry apprentice ship, becoming a full carpenter and at some point going out on his own, first as a carpentry contractor working for other builders and then slowly but surely taking on more and larger building jobs that incorporate other trades that are subcontracted to electricians, bricklayers, painters and the like.

Some years after having started out on his own, Andrew was working like a slave to his business. Because Andrew with his offsider carried out all of the carpentry and general building work on each of his jobs, Andrew had to be on site all day every day. Hence his day would start at 5am in the office, then on site from 7.00 am until 4 pm and then seeing clients and finally back in the office until 10 in the evening. Saturday was a workday as well and even Sundays were not normally work free.

Andrew wanted to Raise a Healthy Bouncy Business, with Raving Fan Customers, and a place where people enjoyed coming to work and be involved in something more than just making money and the opportunity to create a valuable asset for himself and his family.

But Andrew felt trapped by his business

“If I don’t spend most of the workday on site, I can’t ensure that things get done the way I want them to get done” was Andrew’s dilemma.

Andrew was tired.

The Bootcamp

Working in The Bootcamp with me, Andrew came to realise that continuing to be “the best man with a hammer this side of the Blue mountains”, might have been a good reason to get into business 5 years ago, but now he had to learn to resist “the seduction of the hammer”. Holding a hammer in his hands was not the best use of his time, his health or his braincells. it was time to let others take that hammer from him.

So he did… it took a lot of courage… but Andrew started by blocking 2 hrs every Tuesday and Thursday mornings from 7 am to 9.00 am in his diary as “Business development time” At this time he would not come to site and would not answer his phone at all.

At first Andrew felt guilty and anxious and as soon as 9 O’clock came he would race to site and try to make up for lost time but soon he started to notice that things went fine without him. He employed another carpenter to work with him and all his subbies and employees, and clients soon learnt that Andrew was not available at those times and managed fine.

This small change, consistently applied, was the key that got Andrew’s business unstuck and got Andrew on the way to creating something really special.

Now, 2 Years later, Andrew’s business is unrecognisable. Andrew rarely wears his toolbelt at all anymore these days. He likes to keep his hand in from time to time so he might do a set out for a staircase or hang a nice door every now and then but the rest of the time Andrew is building his business rather than building homes.

And what is more, the business has grown 30% and Andrew takes his son to soccer training on Tuesday nights.

And Andrew and his Business lived happily ever after… The End

Ask yourself… Where will you find the courage to make Profound things happen in your Business?

Find out more about the Small Business Bootcamp here

Or follow this link to New Perspectives Business Coaching