More Revenues Do Not Always Mean More Cash

I believe it's important for business people to understand the difference between revenues, profits, and cash. Some of you use these terms interchangeably to mean "I need more money!" But they are different and the strategies to increase each of them are different.

Ultimately, business (especially growing ones) need cash. Cash is like the blood in your body. If you run out of blood, no matter how big your muscles are, you will die. You don't pay your bills with revenue or profits. You can't even buy a hamburger with revenue and profit; the cashier will ask you for cash. So it's important for you to understand where cash hides in your business instead of simply hoping that with an increase in your revenues, your cash will increase.

Revenues and profits are important and if managed correctly, they should add to your cash. But "should" doesn't always translate to "will." Why? Because there are a lot of people who mis-manage them. For some reason, even though you've worked hard to increase revenues & profits, your cash is not increasing. Sounds familiar? Check out these places for your hidden cash:

1. Your accounts receivables. This is a very common place. You sell sell sell, but your clients don't pay pay pay. Your Profit & Loss statements tell you that your revenues are great and profits are healthy... but where's the cash? Well, your customers are using you as their bank. They get their services off you without paying for it. Think about how to incentivise clients to pay early or on time. Be the kind of supplier that people love to work with, so that they will put your invoice on priority. I can give you a few strategies to get payments faster. Maybe we'll do that in the next article.
2. Your payables. While we're talking about payment, let's talk about your payment to your suppliers? Are you paying cash or can you stretch the terms a bit? Are you building relationships with your suppliers so that they can give you favourable terms?
3. Your expenses. Fixed or variable, your business must know how to control its expenses. Let's say you have poor expense control policies. You and your employees waste resources, such as not turning off the lights when it is unused, not comparing suppliers for price, buying things you don't really need, poor petty cash policies, and many more. Do you need such a big office with that big rental, or will a small office do for now? Do you really need an expensive laptop, or will a cheaper version do the job just as well? I remember when I first started, my laptop was a free one I got from a bank. It stayed with me for 2 years before I changed to a standard laptop... and only when my business was going well did I reward myself with a Macbook. When it comes to variable cost, you may have failed to be efficient in making your products, generating too many mistakes that results in wastage of raw materials and labor. And don't forget your employees; are they all worth their salaries? Are you paying non-performers to stay and waste your cash? The only reason you buy an ASSET is if it can help you generate more REVENUES. The only reason you want REVENUES is if it generates PROFIT. And your PROFITS must be converted into CASH. A wise man named Keith Cunningham taught me that. Simple and oh so true.
4. Your inventory. Is your cash all tied up in slow-moving or dead stock? What if you just focused on high-profit, fast-moving items? You would save warehouse space and cash, it will be easier to sell, and it will generate more profits.
5. Your money management. What's the minimum amount of money you need to pay for your business expenses? What are you doing to make your money make more money? Do you need to consolidate your loans and renegotiate a better interest fee? Do you need to put money in investments to make it generate short & long term gains.
6. Your marketing. Is your marketing an expense or an investment? Are you just throwing money in hopes of gaining more market share, or do you base your marketing on data and a clear marketing plan. Do you review your strategies to see what is the return of investment you're getting? Or are you just trying to justify your marketing expense as "branding." Marketing is math. Whatever you put in must generate more returns. And you must balance between short-term gains and long-term ones. Branding is important, but if all your marketing is for branding, then in my experience, you will have a shortage of cash in no time. As a growing company, a good size of your marketing investment must be in direct sell campaigns; it must generate direct returns. That's how you pay for your next campaign.

Increasing your cash does not always mean working on your marketing, selling more, and having more clients. In my opinion, you need to have a good understanding of where cash hides and put in place policies and strategies to ensure that it is managed well. This is not about marketing; this is about financial mastery. For more information, look up Instant Profit book by Brad Sugars. It will give you more financial understanding to generate more money from your business.

I hope reading this article was worth your time investment. Let's make more cash.