Ruth King Photo SmallerProfits are not cash. When you look at the bottom line on your Profit and Loss statement, the dollar amount at the end of each month’s statement is NOT the amount of cash you have in the bank. Profits are turned into cash when you collect for the job, pay the direct costs and the overhead costs associated with the jobs and service that were performed that month.

You go broke by doing profitable work and collecting for it months later or never collecting for it…after you paid your employees and your suppliers.

You go broke by not having timely, accurate financial statements so you can make sure that your products/services are sold at a profitable price.

You go broke by using the cash method instead of the accrual method of accounting. (Cash method means that you record a sale when you get paid. You record an expense when you pay the bill. There are no accounts receivable or accounts payable. Accrual method means you record a sale when you send the customer a bill even if the customer has not paid yet. You record an expense when you receive an invoice from a vendor, even if you haven’t paid the bill. You have accounts receivable and accounts payable.)

You go broke by doing profitable work and the client files bankruptcy during the middle of a project.

You go broke by purchasing too much inventory, giving your employees total access to your warehouse, and allowing them to keep too much on their trucks. You’re betting your hard earned cash that you can sell what you’ve bought. What does your warehouse look like?

Profits don’t pay the bills. However, profitable jobs are necessary to pay the bills. Turn the profits into cash quickly to pay your bills and stay solvent.