It’s time to talk about the Canary Ratio.

The Canary Ratio is the difference between profit and cash flow. This equation is widely misunderstood in the business community. People think, I’ll have a look at my profit and loss report, then I will look at my cash position but realise that the two just don’t stack up...

Why is that?

There’s another five things that come off of your profit before you get to your cash flow position. They are :

1. The movement in your working capital
2. Paying down debt
3. Paying for capital items such as computers, desks and chairs etc
4. Paying dividends
5. Paying tax
6. Those five items then come off of your profit number before you get to see positive cash flow and that’s why there's a difference between the two. If you’re able to understand that, you can measure it and then you can build a strategy around it to give yourself the best chance to be consistently cash flow positive.

Next week we’re looking at the Meth Effect so stay tuned.