What is the definition of bankruptcy and how does it affect businesses?
Let's first understand what the definition of bankruptcy really is. The definition of bankruptcy is running out of cash. And small businesses do this every day. And Bear Stearns did this, too. Bear Stearns was showing a profit the Friday before the Monday that they declared bankruptcy. OK, so running out of cash or sources of cash is the definition of bankruptcy.
And the challenge was just reading your profit and loss statement or your net income statement. Same thing. Right. Is it just you? Based on sales, based on expenses, what you have left over. And a lot of times revenues don't necessarily translate into cash into the business. So if you're in a service business, for example, there's going to be a time lag.
You offer the product or service and then you bill for it. for it. And then you don't get paid until 30 days, 45 days, one can only hope, right? So there's a time lag when the cash actually comes in versus when you actually book the sale. And that's what's really important to not just understand the net income statement, but the cash flow statement.
So sometimes, you know, customers take discounts and what you booked in sales doesn't actually get realized in cash because they take the 5% or 10% or whatever it is.
So there is a relationship certainly between the net income statement and the cash flow statement, but they measure slightly different things the same way that when you go to a doctor, the doctor is going to check various vital signs because, for example, even though you show a pulse, it doesn't tell the doctor if you have diabetes, for example, right?
So each of these different statements, and there are only three that I'm advocating everybody understand, the net income statement, cash flow statement, and the balance sheet, because they will give you a 360-degree view, sort of like the global positioning satellite for what's really going on in the business.
So the cash flow statement is going to measure exactly how much cash goes out the door, and it will also tell you how much cash is left over to pay future bills. So instead of sort of crossing our fingers behind our backs and praying we have enough cash at the end of the month to pay for the light, you know, and the rent tomorrow, we can actually plan for that.
And one of the things in chapters five and six of my book, I talk about things like invoicing policy and collections policy, and it is astounding to me how it's not a focus or it's Mm-hmm. On outstanding invoices. So I have to tell you a funny story. I had a seminar called I Hate Numbers, Accounting for the Numberphobic. No joke. That's what we called it.
And I had some women's president's organization people in the room. So these are multimillion dollar businesses.
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