Bus and Motor Coach Library

Cash Flow and Profitability Are Not The Same Thing!

Author – Brian Niddery (2001)

There is a common belief by many, that profitability and cash flow basically is the same thing.  Unfortunately this belief causes more businesses to "bite the dust" than just about any other reason.

In fairness, cash flow is a very difficult thing to ignore.  After all, there are lots of bills to pay by the end of each month - insurance premiums, payroll, fuel, maintenance and service, government deductions, and maybe a big financial obligation on that new bus you bought last year! 

Somehow you have to generate enough cash during that month to cover all those bills.  And if you're lucky enough to actually see a surplus of cash after paying those bills, you might be forgiven if you are thinking you have actually made a profit that month.  Now if you can keep that cash flow going month after month, then just maybe the company might turn a tidy profit by the end of the year. 

So the idea is to grab every stick of business you can, even those skinny deals that will at least put a little extra cash into the coffers that month.  It becomes rather like a horse race that begins on the first day of every month.  If you can get out of the box fast enough, you might just win the race at the end of the month - and end up with more revenues than expenses.

In this article we attempt to demonstrate how "winning the race at the end of the month" can end up putting an operation out of business by the end of the year.

In the business there is something called the "Revenue Day Net Profit Factor".  This factor is derived from the total number of revenue days that a bus fleet generates in a year, divided into its net annual profit.  An example could be a fleet of 20 bus units averaging 200 revenue days each which would total 4,000 revenue days. In this example say this fleet made a net profit of $100,000. The "Revenue Day Net Profit Factor" thus would work out to $25 per day per bus.  

Similarly one can determine the average "Daily Cost Factor" per bus unit by taking the total cost of operating the business in the previous year and again dividing this by the number of revenue days recorded for that year.  Again continuing with the example above, suppose this cost factor works out to be $450.  Given the "Revenue Day Net Profit factor" of $25, this means that the average rate charged last year was $475 per unit per day.

Now what happens in the situation where you have a unit sitting in the yard and suddenly there is a chance to put it into service for something less than your regular rate - say $375.  You quickly calculate that your driver and fuel costs should amount to $175, which gives you a quick $200 influx of cash.  In the back of your mind you are aware of all those big bills that must be met by the end of the month, so what the heck - you take the deal!

This is exactly where cash flow and profitability become entirely opposite factors.  Although you succeeded in garnering a quick influx of cash, you actually reduced the profitability of your company by $75 (cost factor of $450, less the $375 contract).

This may be hard to imagine; after all isn't some revenue better than leaving a bus parked in the yard and getting no revenue at all?  In short - the answer is No! 

You accepted a deal that paid you $75 less than your "Daily Cost Factor" of $450.  This $75 loss can never be redeemed nor can it be offset in any way!  One may argue that a higher volume of business, even if at slightly lower rates can repair any loss of profitability, but it just doesn't work that way. 

To make up for that one day loss of $75, you need to use the $25 profit margin (Revenue Day Net Profit Factor) from three of your regular rate revenue days.  Therefore you must run that bus unit for a total of four days just to bring you back to a zero profit.  To make up for that one day loss you just sacrificed three perfectly good and profitable days.   

This is the difference between profitability and cash flow. 

It's your choice - you can generate cash flow by running your buses all over the place for nothing, or run them less and make some profit!

So, get out your financial books and take a look at last year's total operating expenses, including those "paper costs" such as depreciation, as well as your personal salary, draws and bonuses (you're not working for nothing are you?). 

Figure out how many revenue days your bus fleet generated, and divide this number into your total expenses.  That figure becomes your "Daily Cost Factor".  To this you must add a healthy profit margin (15% may be an acceptable figure).

By ensuring that your bus units never leave the yard for less than this amount is a sure-fire recipe for profitability.