Surprisingly, many managers don't understand the difference in managing for cash flow and managing for profit. However, learning the difference between these two management skills and knowing when to employ them is key to successful small business management.

What is the difference between managing for cash flow and managing for profit?

If you are managing for profit, your goal is to maximize profit. If you are managing for cash flow, your goal is to maximize cash in hand.

To help you make the distinction, let's use a simple example. Assume we have a bicycle shop with an inventory of a single bicycle. The bicycle cost us $800 and we have priced it to sell for $1,400. Two customers come in the door and both want to buy our single bicycle. Customer A is willing to pay you the list price ($1,400) but won't give you the cash for 30 days. Customer B is there with cash in hand but will only pay you $1,000 for the bicycle. Which offer do you take?

If you are managing for profit, you will always take Customer A's offer of $1,400 because that maximizes your profit ($600). If you are managing for cash flow you'll always take Customer B's offer of $1,000 because that maximizes current cash in hand ($1,000) while still giving you a profit ($200).

Which is the smartest management decision? Well, that depends on how much cash you have in the bank. If you have the minimum cash you need to operate your business over the next 30 days, (we call this the Operating Cash Level (OCL) then you obviously want to manage for profit. However, if you don't have that minimum, you will want to manage for cash flow.

What is the key management lesson?

You always want to be at or above your OCL so you can manage for profit. That will allow you to maximize profit and increase the value of your business. However, if you ever drop below your OCL, you need to switch to managing for cash flow.

Why do we have to manage for cash flow?

When you drop below your OCL, the business just doesn't run right. People spend too much time trying to collect cash or meet other temporary problems that would not effect you had you sufficient cash to meet needs. If cash drops too low, you may even go into crisis mode which can threaten the very life of the business.

How do you determine when to manage for profit and when to manage for cash flow?

		First, you need to clearly define your business operating cash level (OCL). This is the level of cash needed for your business to run smoothly. It varies from business to business, but one month's average sales revenue is a good figure if you don't have a better number.
		Second, you need to know your cash position at all times in relation to your OCL.
		When your cash position is below your OCL, you always manage for cash flow, when it is above, you manage for profit.