There’s a saying in the business world “Revenue is Vanity; Profit is Sanity; and Cash – Cash is King!” It’s the golden rule of business.
While revenue, profit and cash are all important, they tell different stories and have different purposes. Let’s take a look at each and the thinking behind the ‘golden rule’.
Revenue is income a business receives from the sale of its goods or services. It says you have a viable business. Business owners may ‘brag’ when they have $1,000,000 or $5,000,000 in sales, but revenue alone is not enough. It’s only the starting point.
Revenue is not profit. If a business has $1,000,000 in revenue and $1,250,000 in expenses, that business won’t survive for very long. The business needs to be profitable.
Revenue is not cash. If a business makes a sale for $50,000 but only receives $5,000 in cash at the time of the sale, it may not have enough cash to pay that month’s expenses. The business also needs cash to operate.
Profit is the gain after deducting all costs and expenses from revenue. Profit measures the health of a business. If the business can’t make a profit, it’s not a business – it’s a hobby.
You can improve profitability by increasing sales and/or cutting expenses. But beware! Increasing sales sometimes makes a business less profitable if expenses also increase more than revenue. Having revenue and profit are still not enough.
Profit is not cash. Just because a company is profitable at the end of the year doesn’t mean it has enough cash during the year to operate the business. Each year, many profitable companies file for bankruptcy because of cash flow problems.
Cash is a timing issue. Cash flow is the inflows of cash into the business minus the outflows of cash from the business during a certain period of time. The amount of cash received and the amount of cash to be paid out rarely match up. No business has the same cash flow each month.
Small businesses are particularly at risk. One small “hiccup” or disruption can spell disaster for a small business when it doesn’t have sufficient cash on hand to weather the storm.
When you have available cash, your business can survive a downturn in revenue, improve a product, hire that needed person, maintain smooth-running operations, and take advantage of desirable opportunities. But it does much more. Having available cash gives you peace of mind and lets you sleep at night.
Need All Three
Revenue, profit and cash are all important, and a business owner needs to manage all three to be successful. Implementing a simple financial system allows you to do that. It forms a solid foundation that helps you make decisions that will increase revenue, hike profitability and improve cash flow.
Financial management is not rocket science and does not have to be time-consuming. But it is powerful. Financial management changes the future of a business. I guarantee it.
If you want to hear more about how to implement a simple financial system that almost runs itself, please click here to contact me to set up a time to talk.