You check your bank balance. It’s higher than last month. Your cash flow is positive. You must be doing well, right?
Not necessarily. While a healthy cash balance is important, it’s only part of your financial picture. If you only monitor cash position, you will miss the rest of the story, which might reveal profit leaks that are quietly draining your company’s potential.
Before we explore the profit opportunities hiding in plain sight, grab our free Financial Review Self-Assessment to evaluate whether your current systems can show you where money might be slipping away.
The gap between what you’re making and what you’re losing can be staggering. Take this example:
A $5 million company with gross margins just 1% below industry benchmarks is bleeding $50,000 annually. If you are not taking advantage of market opportunities, that “missing in action” profit number climbs a lot higher. A $5 million company with revenue potential of $8 million is losing out on almost $770,000 in profits yearly ($3m x 24% + $50k).
For most owners, discovering just how much they’re losing to underperformance is a powerful motivator for change. But change requires asking tough questions, starting with your foundation.
Foundations First: You Can’t Build on Shaky Ground
Are your systems giving you the information you need?
Accrual vs. Cash Accounting: Unless you’re using accrual accounting, you can’t manage monthly profitability effectively. Cash basis accounting creates a funhouse mirror effect, distorting revenue and expenses from one month to another. Accrual accounting, combined with accurate inventory tracking and accounts payable management, lets you match expenses to the months when related revenue was earned.
Job Costing or Time and Billing: If you’re a service company relying only on overall gross margin, you’re flying blind. Job costing and time and billing systems reveal which projects, clients, and service lines are most profitable, and which are quietly draining your resources.
Goals and Performance Tracking: To make your management process predictive rather than reactive, you and your team should meet monthly to review a dashboard that includes revenue goals and KPIs for the sales drivers (such as leads, quotes, conversions, and pipeline).
Actionable Reports: Your monthly reports should immediately show whether your cost structure is shifting, or performance is changing. A monthly 5-line P&L reveals changes in your cost structure with a quick glance. (Listen to our Podcast, Planning with Breakeven PLUS for more).
Other performance metrics should be front and center in a consistent monthly reporting packet, enabling maximum insights with minimal effort. And don’t forget this: every P&L MUST have a percent of sales column. If someone gives you a P&L without percentages, give it back!
The Hidden Costs You’re Ignoring
Do you have the right management practices to identify and minimize hidden costs?
Inventory inefficiency: Excess inventory doesn’t just tie up cash, it hides shrinkage, obsolescence, and storage costs. Accounting experts estimate poor inventory controls cost over 25% in lost inventory dollars a year. Conversely, stockouts can cause lost sales, production delays, rushed freight costs and wasted time.
Staff turnover: The cost of replacing an employee (estimated at one-half to four times annual salary) extends far beyond recruitment and training. It can take months to recover from the ripple effects caused by resulting lost productivity, institutional knowledge, and customer relationships.
Slow collections: Every day your money sits in someone else’s account instead of earning returns in yours represents lost opportunity and increased borrowing costs. For each million dollars in credit sales one day’s improvement in collections produces about $2,700 in cash flow. If you’re taking 45 days to collect when industry leaders collect in 35, you would have $27,000 of additional cash in the bank for every $1,000,000 in credit sales. A five million dollar company could increase their cash balance (or reduce their credit line) by over $135,000 if they collect 10 days quicker.
The Support Infrastructure Question
Do your advisors provide strategic guidance or just transactional services?
There’s a world of difference between an accountant who processes your books and a financial advisor who challenges your assumptions. Engaging with outside advisors, such as a qualified business coach, accountant, controller, and/or CFO (depending on your company size) can provide fresh perspectives on building a more valuable business enterprise.
Good advisors don’t just spot profit drains. They identify opportunities to grow sales and margins. They investigate discrepancies and anomalies before they become profitability black holes. Most importantly, they help you implement disciplined review and strategic planning processes that capitalize on these opportunities.
Your Next Step
Complete our Financial Review Self-Assessment to identify the weak links in your financial management systems. Be a tough grader. If the score isn’t what you want it to be, don’t get discouraged. Choose one or two to work on now and use the assessment as a roadmap to improve over time.
The difference between surviving, building systems, and thinking strategically often comes down to having the right data in the right format, supported by advisors who push you beyond transactional thinking.
Your bank account shows what happened last month. Your profit potential and costs show what could happen. The gap between them? That’s your opportunity.