Profit vs Cashflow

Making money online is a tricky business.  The key word there is business – if you’re trying to make money online, you are essentially running a business.  Now whether you’ve taken the time to actually set up an LLC or a corporation is irrelevant at this point.  The fact is, you’re in business, and you need to realize that.

The main focus that most people have when starting a business is profit.  How can I make a profit, how soon can I make it, and how much will it be?  These are all very important questions, and profit is an extremely important part of the puzzle.  If you cannot make more money on paper than you are spending, then your business is not profitable, and you will not succeed. 

Did you catch the two most important words in that last paragraph?  In case you didn’t, here they are – on paper.  Stay with me; this is a simple concept but it eludes many would-be successful entrepreneurs.  Let’s say you’re trying PPC -> Affiliate marketing, to keep things relatively simple.  Here’s a simple chart that shows your profit on paper for a six month long affiliate marketing campaign.

At the end of the six months, you have made an on paper profit of $4750 – not too shabby at all!  It’s a total return of 150% of your total investment.  Please not that these are just sample numbers, and not intended to have any basis in reality.

 

So at the end of the six months, you would expect to have $4750 more in your bank account than when you started, right?  Well, no, not exactly.  What you forgot to take into account is payment cycles.  Many affiliate networks pay your January earnings in March, February earnings in April, etc.  Some are faster, but we’re looking at this cycle for now.  Let’s take a look at your cash flow, as opposed to your profit.

  Whoah there, that’s a totally different picture.  When you look at cashflow, you didn’t actually start putting more money in your account than you were spending until May.  You have $1650 less in your account than when you started.  You won’t have your head above water until August if your spending and earning levels remain the same. 

While profit is necessary to run a successful business, cashflow is equally important.  You need to make sure you have the funds available to keep the business running while you ramp it up.  You will likely spend more than you physically bring in for quite some time. It could easily be several months before you recoup your initial investment, and start bringing in a positive cashflow.

So the next time you read about an ebook touting the latest affiliate / ppc program where a “very small” investment is needed, think again.  A small investment every month for several months can add up to real money quickly. 

4 Comments

  1. Leroy Brown said

    April 9 2007 @ 5:33 am

    Ouch there I go again… didn’t check the size of my blog vs the size of my pictures. I’ll get them fixed just as quick as I can. Sorry guys!

    *Update – I got the images resized, so they actually fit and make sense.

  2. Alan Liew said

    April 10 2007 @ 9:42 pm

    When people take about making money online, they tend to forget about cash flow issue and me too.

    Great tips, Have learned something from you.

  3. Leroy Brown said

    April 11 2007 @ 4:36 am

    I know when I started, cash flow was not a word in my vocabulary at all, and I certainly wasn’t considering the concept. It took a few months of my bank account balance shrinking, even when I was making an on-paper profit for me to dig and figure out what was up.

Comment RSS

 

GreenLlama

    Green Llama is a place to learn about making money online. Any ideas or walk-through's I have, I'll post here for your enjoyment. I also do product and online service reviews.

    However, I tend to run off on tangets quite often. I call this part of the site 'random crap'. Basically I'll go off and post about whatever I want, just to keep things interesting. Have fun and stay tuned.