Cash and Profits Are Not Interchangeable

The Merriam-Webster dictionary defines profit as “a valuable return” which would imply there is actually something being received at some point in the process.  However, the reality is that you cannot actually “spend” profits. You must have sufficient cash available to fund the company’s operations until conversion occurs.  Since there is nothing tangible returned by profit alone, the logical conclusion is that without cash conversion there is no REAL profit: CASH IS THE LIFEBLOOD OF EVERY ORGANIZATION. Generating it is the most important aspect of profit management and conversion of profit into cash in the shortest possible time frame should be a goal of every organization.

Back to Basics: Breakeven Point

The breakeven point is the volume in dollars of revenue at which revenue and expense are equal (there is neither profit nor loss).  Any revenue above the breakeven point will provide net profits and any revenue below the breakeven point will produce losses.  The breakeven point is not static and can move from time to time depending on changes in the revenue mix and/or the company’s expense profile.  For example, if one of your fixed cost elements were to increase (let’s say rent), this would move the breakeven point to a higher revenue level.  In contrast, if the revenue mix changed to include a larger percentage of high margin component(s), the breakeven point would move to a lower revenue level.

It is very important to know at what level of revenue your company reaches its breakeven point.  An understanding of the breakeven concept will help you to quickly determine the level of action required and in which areas you should focus your attention in order to improve the financial performance of the company.  In some cases it will be revenue that must be impacted and in others the expense structure must change.  The ultimate decision will depend on the specific environment you are operating in at any given point in time.