Remember this statement: Cash is King
Here’s an all too familiar scenario.
At the end of the quarter, your accountant calls and says “I have good news and bad news.”
The good news is you made a profit.
The bad news is you owe $50,000 in taxes and you don’t have the cash available to pay.
Now what? You either borrow money from a bank or you can go to your investors and ask for a cash infusion.
Neither are pleasant nor long-term solutions.
How many small business owners actually understand their financial statements well enough that they can and do make intelligent meaningful decisions so they can make more money?
I would venture to say less than 20%.
Successful businesses do two things
#1 they make money and #2 they generate cash.
How many of you understand the difference?
You can make a profit and still go out of business because you have a negative cash flow.
Cash flow will keep the doors open, long after profitability will.
Making money is about your profitability and cash is about the wealth-generation of your enterprise.
You can’t spend profit; you can only spend cash.
I heard a great analogy from a man named Mike Holly.
In the financial statement story, there are three characters: Vanity, Sanity, and King.
Revenue is Vanity
Profit is Sanity and…
Cash is King
Everyone wants to grow their business but they mistakenly believe growing revenue or sales is the end-game. It is not. ☹
Those that chase growth based on Revenue are on a fools’ errand. It causes you to make bad decisions because you are operating from the notion that everyone is your market and there is nothing further from the truth.
When Revenue is your end-game and everyone-is your-market is your mind-set, you spend money foolishly on things that don’t matter for customers that don’t matter.
Things like inventory for the 80% that are generating little to no profit.
Sanity is looking at the world in black and white. Sanity hates being in the RED.
Sanity manages costs and expenses so that margins are high – both gross and net margins are important to Sanity.
So, here is the short Story-line for the characters:
Vanity goes out and generates sales or revenue. From that revenue, we deduct the cost of the product or service which leaves us with gross profit and that’s where Sanity steps in.
Sanity’s role is to manage those costs and the overhead expenses associated with running the BIZ; things like rent, utilities, wages, employee benefits, insurance, etc, etc, etc. So, we deduct these additional expenses and that brings us to net profit.
But wait, the business then has to pay taxes, and sometimes distributions to investors. What is left is called retained earnings or for this simplified version – cash.
The King hates surprises. The King wants consistent positive cash flow.
Bottom line: You want to be operating from your 80/20 Sweet Spot so that not only are you making a healthy profit but you have a consistent and predictable cash flow month in and month out year-in and year-out.
Implementing our Profit First system will cure this.
Cash is King.