Columnists Archive It is NET that matters

It is NET that matters

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I just read the April 2009 column, and found it to be a very good teaching tool. It is NET that matters.

However the concluding sentence is in a profit and loss sense, wrong. Selling your own diamond should have NO different effect to your net bottom line than a memo sale. One should have the same gross profit, and even the same net profit on either sale.

The difference is the effect on CASH FLOW, not Profit & Loss. Cash flow is what often causes businesses both large and small to fail while they may indeed have a net profit. The sale of an owned piece of inventory would create cash that should be free for the business to spend or keep as it chooses, the sale of a memo/non owned item, produces cash that first should be used to relieve the newly acquired liability of the unowned item being sold. The difference between the amount the item was sold to the consumer and cost of the diamond is the gross profit, and that gross profit % should be the same whether the item is owned or on loan/memo.

Just thought this should have been made a bit clearer, as the effects of CASH FLOW are often ignored, and frankly are one of the primary reasons for the current world economic meltdown, as companies large and small were not able to effectively plan or manage their cash flows.

Rex Solomon
Houston Jewelry
Houston, TX

 
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