There is an old saying that goes like this: Turnover is vanity, profit is sanity, but cash is reality.
I don’t think that there has been a time in my memory when this has been more true. Over the last 18 months, businesses that had or could generate cash were in the best position to weather the Covid storm. The government helped out with cash in the form of grants and Bounce Back and CBILS loans. But the day eventually comes when you have to be in a position to generate your own cash.
We all like to measure our businesses and the figure we are most likely to share is turnover. Apart from anything else it is a bigger number and sounds more impressive. Sometimes size is everything. However, if you cannot make a margin on your sales or if it is not enough, you can boast all you want about turnover, but you are heading for the buffers, probably at speed. Vanity.
Every business must make profit. In fact, you have a duty to make profit. Let me explain. You run a business and on the face of it, that is nobody else’s concern. However, your dependents depend on you to be able to extract cash from your business. If you employ staff, they rely on you to pay their wages so that they can support their own dependents. You have a heady responsibility for the wellbeing of all these people and you cannot fulfil this responsibility unless you are making profits. Profits keep you, and everyone else, sane.
If you are making profit and not spending or reinvesting it, you should be accumulating cash. If you are spending or reinvesting more than you generate in profit, your cash will be depleted, and you could end up at the buffers anyway.
Reality strikes when you run out of cash, you cannot pay your creditors when they fall due for payment and then one of them, possibly HMRC takes you out of the game.
So, you run a profitable business. You have plenty of orders and the staff are busy. You know you can generate an adequate margin. You are controlling your overheads. Profit is within your sights. But the part that a lot of business owners don’t like to do is get their sales invoices out promptly. Up to the point when you invoice you are the knight in shining armour, supplying goods and services that your customer wants and needs. But then, you want to take some of their hard earned cash and you are no longer the friendly helpful supplier, solving their problems. You want to raid their bank account.
Customers often pay promptly when you invoice promptly. So why are business owners so reluctant to issue invoices. No invoice means no cash and no cash means no business. Hence the title of this piece – an invoice a day keeps the creditors at bay. You may be in a business where you issue, or should issue, invoices more or less frequently than this but I think you will get the principle and understand the truth in the phrase.
This is a very peculiar time. It is a testing time for virtually every business, and many will not have survived. Others, possibly you, might still be at risk. Some have really thrived because they were agile and pivoted their business and managed to provide something else that people wanted during the lockdown. They are lucky ones. We kept going because we are highly digital in our approach and therefore flexible enough to accommodate remote working almost seamlessly. It just depended on the nature of the business and how they were organised as lockdown started to bit.
So, what lessons have you learned? How will you deal with the next pandemic?
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Alan E Long
The Long Partnership