What would you rather have – a profitable business or a cash cow? The one is definitely not the same as the other! Just look at Enron and the millions of ’Profitable’ businesses that have collapsed.
It tires me to hear businessmen and women brag about their profits. It is the cash position of the business that counts. Profits can be easily manipulated either way, but cash reserves never can! The business graveyard is full of profitable businesses that have collapsed simply because they ran out of cash.
Why is this the case? Because the guardians of the business are watching a different ball game to the one being played right in front of their eyes. “Oh … I watch my cash position – my bookkeeper gives me my reconciled bank balance every day” is the typical, universal, response of any business guardian whose business is, or soon will be, immobilised in the mire of cash flow difficulties. People truly like to deceive themselves!
So, what should you be doing? Manage your business on a cash flow basis! It is the business guardian’s responsibility to review the true cash position for today, tomorrow, next week, next month and up to one year ahead … daily. You will easily identify the cash holes and you will not be tempted to spend the cash when you hit that nice peak. At the very least, you will be aware of the problems and be able to give yourself a chance to take remedial action!
The model one builds for this is simple, but few people seem to be able to grasp the concept.
Here is a simple formula, which will focus your fundamental thinking on managing the business on a ‘cash flow’ basis.
The object of a business is to make money – right? What then is money?
Money is Cash!
What is cash?
Cash = Sales – Production Expenses – Inventory
Where:
- Expenses are ALL the expenses in the business EXCLUDING depreciation because it is not a cash outlay. These expenses incorporate your fixed, semi-variable and variable expenses.
- Inventory is ANY DEAD MONEY. Physical stock on hand is part of inventory, but so are debtors part of inventory, as are underutilised plant, work in progress and those plans you have for the future (always difficult to quantify).
Every opportunity must be taken to reduce expenses and turn dead money into cash.
This equation can be applied to any situation in the business to see whether that staff member, product, customer, activity, decision etc., is a cash contributor or a cash drainer.
Can you see the difference between profits and cash?
Remember that internal misjudgements are six times more likely to cause business failure than external factors. The message is clear … keep objective help close at hand at all times, and if you don’t have it, get it without delay.
The success of the business is all about you!
QUOTATION:
Remember: you aren’t responsible for the misfortunes in your life, but you are responsible for doing something about them. (Unknown)