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Climbing ‘Profit Peak’ (Conclusion)

Advanced planning + honest forecasting = smooth operations

SAN FRANCISCO — Managing your finances helps you grow your business.

As fabricare professionals, you need many skills to handle the myriad of issues you face every day. You must oversee products, people, logistics, production, sales and marketing, locations, facilities — and it’s a full-time job.

But even more importantly you need to manage the finances, which appears to be a daunting task for many cleaners who contact me for assistance.


Your banker, your suppliers, and your professional advisors all care a great deal and so should you and your management team. Financial statements are the language of the credit world, so having your statements in professional order and understanding their impact yourself are vital to optimizing your credit and liquidity.

Your managers should also be schooled in the relationships between the operation and the finances so they can manage for success.

The most misunderstood difference is between the P&L and the cash flow statements. It is also the most critical to understand.

Our industry uses both cash and accrual accounting and some companies combine the two, making the distinction even murkier.

To best understand the difference and the resulting impact on operations, let’s examine the factors that affect both statements:

  • Accounting method: accrual accounting vs. cash accounting;

  • Changes in accounts receivable;

  • Changes in accounts/notes payable; and, 

  • Changes in inventory.


Although the different approaches have pros and cons, the accrual accounting method is the most challenging from a daily operations perspective in our industry.

For example, if your sales are booked on incoming orders (as many are), they do not reflect collected revenues and may not convert to actual revenue, so the money may not be there when it is needed.

The same is true for accounts receivables and the terms that are extended. You must pay your employees regularly for the time worked, however your customer may take 30, 60, 90 days or more to pay you.

Usually the inflows and outflows offset each other over time if the company is profitable, but consider that large fire restoration order that has been complete for 90 days and there is still no cash in sight.

What was the source of funds that you already had to spend to pay for the labor, supplies and overhead used to produce that order? Are you planning for the results of your contract terms?

Conversely, cash accounting can give you a false sense of security because, in high season, your P&L looks great and you have money to pay for your wish list of acquisitions, expenses, expansion, bonuses, etc.

However, what reserves do you need to set aside to cover overhead in the low season when your P&L is anemic?


Many of you have experienced the euphoria of a fat balance sheet due to high accounts receivable and the misery of the rude awakening when that receivable has to be written off as uncollectible.


Celebrations often accompany the final payment on a note or the payoff of a large account balance. Although it has little effect on the operating P&L a loan payoff greatly affects the cash flow, the balance sheet, owner flexibility and peace of mind.


If your inventory is high but old, it is not really as valuable as if it is low, fresh and turning weekly.

Awareness of the diminishing value of the inventory and the dwindling likelihood of collecting fees for processing greatly affects realistic cash-flow projections, especially if the sales are booked at drop-off instead of customer pickup.

Inventory is a perishable item with an expiration date that must be actively and aggressively managed.

The impact of worn-out or defective equipment adds greatly to negative cash flow on a daily basis when all of the resulting effects are considered.

For example, a shirt unit that must be repaired regularly is expensive in excess labor expense due to downtime for the operators, increased touch-up labor, and in management distraction, but also in delay of moving the shirts through the plant and onto the vans for on-time delivery.

The maintenance provider(s) must be called in and paid, the parts may or may not be available immediately, inspection may be skipped or rushed, assembly and bagging are delayed, drivers are delayed, store racking is late, and customers may be disappointed by the poor quality, the shortcuts taken or failure to receive orders on time.

Every step along this path is expensive and damaging to your image, reputation and business. A healthy business must have reinvestment funds set aside to maintain optimum operations.

All of you can give examples of financial reporting concerns. They are a regular occurrence for business owners, but advance planning and honest forecasting can overcome most of these issues, providing for relatively smooth operations that can grow sales and profit on a predictable basis.  

To read Part 1, go HERE.

Have a question or comment? E-mail our editor Dave Davis at [email protected].