Why Cash-flow Outranks Profit in Business
Kent based Business Advisor Glyn Moore recognises the primacy of positive cash flow and firmly believes that it is vital for business survival and growth.
A good sales creed is “give me cash not credit”. It is also the tune that successful businesses sing. It does not matter if your gross margins make your competitors green with envy if you don’t get paid in time to keep your creditors off your back. By putting in place simple systems, many businesses can move from “just surviving” to “really thriving”.
Just because you’re making great gross profit doesn’t mean that you are putting lots of it into your pocket. Nor do great levels of gross profit mean you’re doing well. In fact it could mean that you’re going to go bust sooner than you thought! There are many examples of businesses that sold so much so fast that they couldn’t pay their monthly bills. Primarily because they weren’t paid quickly enough from their customers, but now have to pay more bills from suppliers to cover their newly increased sales.
To some this will sound obvious, to others it will come as a surprise. However, to Glyn the only surprise is how many business owners don’t actually plan for their cash flow throughout the year. Often they don’t have a basic cash flow forecast, let alone the ability to model potential changes in their businesses. For example, can you model the effect on your cash flow as a result of:
- A change in your turnover (even a slight one)
- An increase in your prices
- A decrease in your prices
- A change in inventory levels
- Taking on a new salesperson or any new employee. Or indeed letting one go.
- A change in your receivables or your payables (how quickly you get paid from your customers or pay your suppliers).
- Reducing your overheads
- Increasing your borrowings
Do you just carry out changes and assume/hope that they will be beneficial? Do you just try and increase your sales and assume/hope that this will be good for business? Whilst it normally is good for business, surprisingly, and sadly, often it isn’t. It can cause a myriad of problems such as more work, increased overheads, cash flow problems, operational or production issues.
Glyn concludes “It is always better to model the changes before you carry them out to see what the impact will be on your business and, indeed, your life. The unfortunate fact is that cliches are sometimes correct. Turnover is vanity, profit is sanity, cash flow is reality.”