Is running a business any different?  Is there a way to know if you win or lose each day?  Each week?  Each month?  Each year?  The answer to all of these questions is yes, and I write about how to accomplish this in my recent American Express OPEN Forum Article: 4 Reports that will Keep Your Business Thriving.

PLEASANT GROVE, Utah, May 21, 2009 - CFO WISE is proud to announce that its Founder & CEO, Ken Kaufman, will be a guest speaker in the Provo Technology Xelerator workshop series. Ken will be presenting three workshops that teach entrepreneurs how to drive their Profits, improve their financial health, and maximize their cash flow.

CFOwise founder Ken Kaufman commented on this opportunity to share his knowledge with others in the community by stating the following, “The Provo Technology Xelerator creates an amazing opportunity for the entrepreneurs who participate.  With the bestowal of scholarships, each entrepreneurial firm receives free office space and no cost mentoring and coaching in how to get their businesses off the ground and running.  I look forward to being a part of this exciting initiative.”

About CFOwise

With over a century of senior-level executive experience, CFOwise is the premier provider of permanent part-time CFO services to start-up, emerging, and medium-sized companies in the United States. For more information, please visit: www.cfowise.com or contact Kim Waldron at 801-380-5615.

About Provo Technology Xelerator Workshop Series

The Provo Technology Xelerator is a collaborative partnership of the Provo Business Development Corporation, the Technology Center at Novell, and Broadweave. The Provo Technology Xelerator helps emerging technology-based ventures to accelerate their time to profitability through facilitating access to money, markets, and mentors. Provo Tech X connects innovative ideas, talented entrepreneurs and experienced technicians with needed resources to create new technology-based companies. Provo Tech X is a catalyst of the entrepreneurial ecosystem of Utah Valley. For more information please visit: www.ProvoTechX.com .

This is great financial help for small business owners. Not only do you need to get online, but, with the overwhelming amount of available content, you need a strategy to make your web presence stand-out. So, how do we calculate ROI on web strategies? It is important to note that you cannot trade sales dollars for costs. In other words, you cannot say that you spent $10,000 on your web presence and that if it generates over $10,000 in revenue, then you have made money on the dollars spent.

You must consider your gross margin, because you will have certain costs that will vary with an increase in sales, or, in other words, you will incur costs to provide your products or services. If your gross margin, or the percentage of sales remaining after you subtract your variable costs from your revenue, averages about 30%, then your break-even on $10,000 of investment into the web would be $33,333 ($10,000 divided by .30).

THE CASH VS.PROFIT DILEMMA
Your profit and your cash will almost never equal each other in the same period. This is one of the most difficult concepts for small business owners and entrepreneurs to understand. Here are two examples to help you understand the difference between the two.

EXAMPLE 1 – POSITIVE PROFIT, NEGATIVE CASH FLOW
Let’s imagine you start your business and in the first month your sales explode. You generate $100,000 of sales and you are amazed. Your gross margin on your sales is 50%, meaning your gross profit is $50,000. Since you are a new business with very little overhead expenses, you only spend $10,000 in this category. Your profit for the month is $40,000. But does that mean you have $40,000 of profit in the bank? Most likely not.

While you were having this great month, you spent $60,000 on overhead and your costs of goods sold. Assuming you paid for all of these during the month, your cash outflow was $60,000. But what about your cash inflow? Assuming you extend net 30 terms to your customers, you didn’t collect any of your sales for the month during the month. So your inflow is ZERO. The bottom-line of this example is this: $40,000 of profit, but a negative $60,000 in cash flow. Profit does not equal cash!

Perhaps the biggest challenge that this situation presents is that while you celebrate your fantastic first month in business, you can’t figure out why all of your checks are bouncing. An additional challenge is that the you may actually think something is wrong with the business and make a bad decision as a result.

EXAMPLE 2 – NEGATIVE PROFIT, POSITIVE CASH FLOW
For the second example, let’s assume month 2 of your business has sales of only $10,000. Assuming a 50% gross margin and $10,000 in overhead expenses like last month, this business will post a net loss of $5,000 for the month. But what about cash?

Well, assuming all the customers pay on time, you collect the $100,000 of sales from last month, and you pay your cost of goods sold and overhead expenses of $15,000. Your net cash flow for the period is a positive $85,000. So, the company recognizes a loss but nets $85,000 in cash flow. Again, profit does not equal cash and the bank account balance is at $25,000 at the end of month two.

The biggest challenge with this scenario is you look at the bank account balance and feel great. If you fail to realize you need to improve next month’s performance you will quickly erode all of your profit from the first month.

THE COMMON ENTREPRENEUR QUESTION
Most entrepreneurs will, at some point, ask a version of the following question when they are looking at their financial statements: “How can this report say I lost $20,000 last month when I know I have $50,000 in the bank today?” This question is usually followed with: “This report must be wrong.”

Knowing that cash and profit almost never equal each other in the same period, the fact that the two are different potentially validates the accuracy of the financial statements. Understanding the dynamic difference between profit and cash will empower entrepreneurs to improve both their profit and cash. And it can also be the catalyst to correctly forecast their company’s cash flow.

CONCLUSION
How can entrepreneurs best understand the difference between their profit and cash? The best way to accomplish this is a thorough review and analysis of the company’s monthly financial statements (which should include, at a minimum, a balance sheet, income statement, and statement of cash flow) by a CFO Partner. In addition, the exercise of forecasting these statements will help validate and invalidate your assumptions on a monthly basis until you have a firm grasp on all of the moving parts in the company’s cash flow.

Should entrepreneurs look at their bank account balance regularly? Sure, so long as they agree to not be fooled by the balance.

First, we need to understand how long it is taking you to collect.  The most commonly used ratio to determine this is Days Sales Outstanding (DSO).  The calculation is not difficult: 

(Accounts Receivable Balance / Estimated Annual Sales) X 356 = DSO

This will tell you how many days, on average, it is taking you to collect.  Is your number too high or too low?  First, what terms do offer your customers.  If you offer net 30 terms and your DSO is 45 days, you may have some problems.  Second, what is your industry’s average DSO?  Are you higher or lower?  These two factors will give you a benchmark for how you are currently doing.

There are many initiatives a company can implement to improve, or reduce, its DSO – which will result in better cash flow for the company.  An article by Block Blackburn (CLICK HERE TO READ THE ARTICLE) discussed many strategies for your consideration.