Page 90 - Finance for Non-Financial Managers

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Profit vs. Cash Flow
In any event, cash is still going out at this point, even
though credit may allow some delay in payouts. We know the
Wonder Widget owners used credit to leverage their cash, 71
because unhappy creditors later took them to court.
Wonder Widget was now ready to begin production, manu-
facturing Widgets. They began using their inventories of materi-
als, adding the labor of the workers they have hired and a host
of other costs needed to complete their product. This process
consumed even more cash—workers’ wages and related taxes,
materials to replace those consumed in production, sales and
marketing efforts to find new customers for their products,
delivery of products to customers, billing, administration and
accounting, and so on. This is typically the period of greatest
cash consumption, when a company is in full production but no
cash is coming in yet. The company hasn’t sold anything yet or
has sold products but on credit, so the customers haven’t paid
yet. At the same time, production and all the related business
activities mentioned above must continue.
Continuing on with the remaining steps in the cash flow
cycle, the company finally, after investing all that cash, gets to
actually sell something and begin the process of recovering that
cash it’s been investing. In the sales part of the cycle, it succeeds
in selling products, on credit of course, and sends out invoices
that say “Net 30” on them. That means the customers will pay
them 30 days after the date on the invoice, right? Not likely.
While collection may seem like a minor activity compared
with production or sales, it’s the critical step needed to make all
the rest pay off. Nolan Bushnell, founder of Atari and Chuck E.
Cheese Restaurants, has told his employees and countless audi-
ences of would-be entrepreneurs that a sale is a gift to the cus-
tomer until the money is in the bank. So, the final step in the
cycle is the one that turns the entire effort back into cash again.
At that point some key answers will surface: Did the company
ultimately make a profit on its business activities? Did the com-
pany plan adequately for the working capital it will need to
finance the cash flow cycle in its entirety? As we’ve seen in the