If you had a choice between profit and cash, which one would you take?
I’ve met plenty of business owners with highly profitable businesses that didn’t have enough cash on hand to pay their children’s school fees. That’s not why we do business. We don’t want to work hard everyday and still not be able to support ourselves and our families.
So profit is good, but it’s not good enough. Businesses also need sufficient cash flow. Many profitable companies actually go out of business because they don’t have enough cash. But it doesn’t have to be that way. You can avoid or recover from your cash flow problems by understanding and applying some basic principles.
No matter how great your product or service, you always need cash.
It costs money to do business. Most entrepreneurs know this, but some of them still cling to the hope that if their product or service is superb enough, the money will automatically come.
Profit is an Opinion, Cash is a Fact.
Profit does not equal cash. Some people assume that if their business is profitable, then they’ll have lots of money in the bank. Profit isn’t measured by your bank statement. It’s measured by your income statement and represents the amount of money you could potentially have in your bank account if you got paid immediately.
In reality, most business can count on AT LEAST 30 days before the numbers on the income statement manifests into actual payments. In that interim, however, many businesses don’t have enough cash already available to cover the current month’s overhead and cost of doing business. That’s where the next set of principles come in.
Start with as much cash as possible.
There are a few ways to get start up cash, whether it’s through online crowdsourcing, loans from traditional banks, your parents’ money, x-friends money, a personal savings, or some combination of approaches. There are 20 to 30 new crowd sourcing sites being started each month, and they are becoming far more targeted vs one site fits all. Try to acquire three times the amount you think it’s going to cost to start or expand your business. You may not make it, but you will be more prepared for the reality that it will take more cash than you think to get started.
Save as much cash as possible.
When you do finally get paid, I know you’re thrilled, but don’t rush out and buy new iPad mini’s for all of your employees. Itunes giftcards for $15.00 WILL DO! It’s time to act like you didn’t get paid and hold on to the cash as long as possible. FOCUS on cutting costs, and hand out those giftcards when employees come up with cost savings ideas that actually work. Don’t reward ideas, reward results.
Growth Takes Cash
Saving cash will help you survive future growth. That’s right. As great as growth sounds, it costs more to do MORE business. You’ll have to purchase more materials, higher more employees, and possibly acquire more real estate.If you don’t have the cash available, you might miss out on good growth opportunities.
Pay slowly. Collect quickly.
This doesn’t mean you should default on all of your bills or just go into foreclosure or eviction. And it doesn’t mean you should hire bookies to assault people who owe you money.
Even big businesses pay bills late, and if it’s good for the goose, it’s good for the gander. Taking your bill payments to the very edge helps maintain your cash flow. Prioritize your payables and pay the most critical first.
To collect payments more quickly offer incentives to people who pay you sooner, perhaps discounts or additional products and services. There’s no coincidence that business charge fees when you use credit instead of cash. There’s a reason some gas stations charge you less at the pump for cash payments. Those business owners know that a little less cash in their hands right now is better than a little more cash 60 days from now.
So, I go back to the original question I started with. Profit or Cash? Which would you choose? If you’re still undecided, let me suggest cash. You can’t sustain a thriving business without it.
That’s the bottom line.