Profits are Not Cash
This is a misconception for many business owners. When you get your profit and loss statement at the end of the month, the bottom line is the amount of profit you made. It is not the amount of cash you have in the bank.
Profits are turned in to cash when you collect your receivables and pay the bills associated with the creation of the product or service. You might find that a product or service you thought was profitable actually wasn’t profitable.
You can be profitable and go out of business. One former business owner had been profitable for over 10 years. In one week, three of his major customers filed bankruptcy, leaving him with over $1,000,000 in bad accounts receivable. He didn’t have the cash to cover the expenses for those jobs and went out of business.
You can profitably grow your company out of business. As you grow, you invest more in inventory, accounts receivable, fixed assets, and people expenses. If these expenses outstrip your ability to pay for them, you will go out of business.
Profits are important. Converting those profits to cash is even more important.
Is Increasing Sales a Good Thing?
I'll bet most of you said "Yes". The REAL answer is "It depends". Here's why:
Cash Conservation Ideas
Cash is the lifeblood of your business and you must watch and protect it. Last December I ran across the audio CD series, Prosperity Consciousness, by Frederic Lehrman. (It’s available from Nightingale-Conant (www.nightingale.com) and cheaper there than on Frederic Lehrman’s website).
One of the questions that he asks on the audio CD is how much money has gone through your hands since you started working? For most of us who own businesses, the answer is millions. What if, he continues, you had 10% of all of that money? That really got me thinking. That would be a nice financial cushion. None of us would be beholden to the bank for our mortgages or loans.
The more critical question, can you take 10% of everything that comes in the door and save it? If your bottom line is less than 10%, then the answer is no. If your bottom line is more than 10%, the answer is yes. The reason: if you took 10% of every sale that came in the door, that 10% would be a direct cost (an expense because you sold something) and your gross margins would decrease by 10%.
In addition to this 10%, or perhaps instead of this 10%, we really need a “rainy day account” to save us when unexpected bills come.
“Rainy day accounts” are monies that you consistently put aside for the times you need it. However, is 10% realistic? Probably not. What should be in your “rainy day account” separate and apart from a bank line of credit or bank loan? It is much better for you to be your own banker. If you want to pay interest, pay it to yourself. Establish an interest bearing account at a bank or a money market fund. Banks aren’t paying much interest these days. However, if you go to www.money-rates.com you can find the highest interest rates.
There is an easy ways to invest in your rainy day account. Write a check to this account for 1% of all deposits that come in the door. This takes discipline. You can’t wait until the end of the month to do it. You’ve got to do it every day or at least once per week. You won’t miss 1% of revenues. And, the deposits add up over a period of time.
The key to this technique is to have the discipline for regular savings deposits. It is actually a job for your bookkeeper. You’ll be surprised at how quickly the dollars add up. And, they are there to fund emergencies, slower times of the year when you need cash to pay bills or payroll, or from a positive side, to fund asset purchases. In my opinion, it’s better than borrowing on a bank line of credit for operating capital or a bank loan to pay for an asset. Pay yourself the interest instead.