I am making a profit. So why do I have a cash flow problem?

I have just written up three reports for clients in Israel, where cash flow issues have been paramount.

In two of the cases, there was a burning question for the CEOs as to why they had cash flow problems, when their accountants were filing profits (at least on paper). Evidently, there was a confusion over the difference between cash flow as opposed to profit and loss statements. Noticeably, in all three situations, there was very little attempt to plan cash flow trends up to two months in advance. In fact, there were frequent complaints that their businesses were too complicated for such detailed planning.

Before writing this blog, I visited Mr Google and entered the phrase “cash flow problems”. On the first page alone, I found entries from New Zealand, Canada, and Italy to name just a few. And again, the common theme appears to be lack of planning.

So you have to ask the question, why do we all do it? Why do we ignore the very obvious? Why do we try to spend money, which we effectively do not have the moral right to sign away? What’s the default bomb ticking inside our minds? Why did my clients ignore the fact that multinational conglomerates plan their cash flows, with enterprises multiple times more intricate?

I have just had the fun and pleasure of reading Dan Ariely’s third book “The (Honest) Truth about Dishonesty“. Page 245 summarises ‘the forces that shape dishonesty’. Maybe somewhat surprisingly, one of the most dominant factors is not financial but the ability of humans to rationalise a truth out of fiction.

What does this mean in the horrendously practical world of commerce? If the minutiae are too complex, then it is not our fault and the money will appear when we need it. We convince ourselves that if a cheque cannot be covered, then it is the problem of the supplier, and nobody likes suppliers. Anyway, the banks can deal with it, and nobody likes banks either. In effect, we weave a spider’s web of ‘sort-of truths’ – the ultimate spin!

Judaism (and maybe other religions) determine that the main difference between humans and animals is the higher level of ability to communicate with each other. Specifically, humans have stronger mental skills.

When it comes to cash flows, we are faced with a rational choice. We can take on the responsibility of understanding  the financial flows of our company into the future – say 30 to 60 days ahead.  In other words, we can use our inherent skills. Or we can just hope and pray that it will be all right on the night. Guess which approach successful businesses use?

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