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PROFIT AND CASH FLOW DON'T NECESSARILY GO HAND IN HAND

There are business fundamentals that are common to each and every business - and at the heart of every situation is the importance of profitability and cash flow. It is vital to understand the difference between them and that profitability and good cash flow do not necessarily go together.

Profitable businesses can go out of business because of cash flow problems.

So what is profit and what is cash flow?

"Profit" is what's left over after you've paid all your expenses. This is nothing you didn't know before. The important thing to note is that profit is "what's left over". PROFIT IS A RESIDUAL. It is a consequence of what happens in and to your business. Some of these things are within your control and some of them are outside your control. If you're going to have any effect on your profit, you have to focus on those things over which you have control.

So what are they?

To answer this question, it is helpful to understand that there are only four specific factors that determine profit. These are:

1. the PRICE you charge for the products and/or services you sell.

2. the QUANTITY (or volume) of products or services you sell.

3. the costs you incur directly in producing or buying the products and services you sell. We call these VARIABLE COSTS because they increase or decrease as your sales increase or decrease.

4. the costs you incur whether you make any sales or not. These are called FIXED COSTS because they don't change with changes in sales volume, at least not on a day-to-day basis.

Let's use an example to put these four factors together.

Suppose you sell a product called a widget. It costs you $60 which is the variable cost and you sell it for $100 (this is the price).

If you sell 100 widgets (the quantity) the...