You’ve probably heard that phrase before. Well, I’m here to tell you that it is fatally flawed.
It is easy to boost turnover – Just do a few deals with a few customers willing to snap up a discount. Salespeople all over the world do this every day, and get paid a bonus for it, in spite of the damage they are doing to margins. (Don’t get me started on pricing and margins – I’ll save that for another day)
It is actually quite easy to make a profit – Just sell stuff for more than you paid for it. If things get a bit tight then your accountant will know how to massage the balance sheet in order to squeeze out a little bit – or maybe a lot – more.
Beware, however, as both of the above methods are a well trodden path to disaster. A few years down the line your salesperson and your accountant will exit, taking a nice bonus, and leaving someone else to sort out the greedy customers, the lack of bad debt provision, the piles of obsolete stock, the fixed assets clean-up and creditors baying for blood.
What isn’t quite so easy is managing the cash. It is the one sane truth left after all the other metrics have been massaged. It is the single most important factor in deciding if your business is going to fail. More than anything else, businesses go bust because of lack of cash.
Having a posh office, a fabulous website and a warehouse full of stock is meaningless if you cannot pay your staff, your suppliers or your tax bill.
Of course, it doesn’t help that we are brought up by accountants who force feed us a diet of budgets that focus on the P&L. Each time being presented as turnover being the meat in the main course, the balance sheet relegated to a stodgy dessert and the cash flow getting ignored as we’ve all got indigestion by that point.
- Do you know how much available cash there is in your business?
- Are you monitoring cash on a daily basis?
- Are you forecasting your forward cash flows?
If you said ‘no’ to any of the above then get a grip before it is too late!
The truth is that the opening phrase is wrong – profit is not sanity. Too often profit is just a construct that almost any accountant can manipulate to fit the situation. A good accountant, however, will tell you the truth, pick up the pieces, sort out the mess, and drive the cash.
How do I know? I’ve spent the last ten years in business turnaround doing exactly that!