Profitability Principal 3 - Profits and Cash Flow are usually not the same thing.

Cash either leads or lags profits. An increase in your accounts receivable balance means that while sales may be up, the cash has yet to come in. Conversely, you could be loosing money and not realize it due to strong cash flow produced by lowering accounts receivable and inventory balances.

It’s not all that hard to temporarily produce positive cash flow while suffering a loss of profits. A new loan will do it. However, the only way to produce long-term positive cash flow is to produce profits. You can’t borrow your way to prosperity so concentrate your management time on producing profits rather than cash.

There are two big factors that produce a difference between cash flow and profits. Accounts receivable and more importantly inventory levels. Failure to keep your A/R current and your inventory levels low will begin sucking up cash faster than your profits can generate them. Additionally, high inventory and receivables inevitably results in eventual losses due to write-offs. Many times these losses are not discovered until year-end when it is too late to do anything about it.

If a business that is in danger of collapsing then the only thing that counts is cash flow, not profits. This strategy only buys time for a new plan to work. With a new plan, maybe you can save it. Without a new plan there is no chance for success. In my experience, you are better off minimizing the loss to the owner by giving it up and moving on with your life.

Profitability Principal 2 - In order for any profitability formula to succeed you must make sure that it does not conflict with your primary strategy.

You can’t be all things to all people and businesses are no different. Adopting a strategy of being extraordinarily good at all things produces a business that is mediocre at best with nothing to differentiate them from their competitors.

Successful retailers have, by design or happenstance, become very good at one or two things and at least adequate at all other things. That “One Thing”, be it speedy delivery or depth of product offerings, is not to be trifled with lightly.

Make sure that any changes to your business processes do not impede your
excellence at that “One Thing” or you might end up with a net loss due to lower
sales.

Profitability Principal 1 - It's the process that makes long-term profits.

This principal took me the longest to learn. Let’s say you decide that you want to reduce your inventory levels. You could achieve this by requiring that all purchase orders be approved by you. Then you could then reduce the quantities ordered for products that are being over ordered. Inventory levels will then begin to drop.

However, this will only work until such time that you get busy with other projects. The PO's start to backup and you start rubber stamping them to eliminate the backlog. Eventually, the inventory levels slip back to their previous levels. To permanently lower the inventory levels you have to make some change in the business process so that the system will produce the needed results without the necessity of supervisory intervention.