Income is vanity, profit is sanity, and cash Flow is king
Let’s face it: running your own business is hard work. It’s more rewarding than a steady job for those of us who chose that path, but it’s also way more challenging in many ways. It usually takes more physical, mental and emotional energy, because the survival and success of the business define to a certain degree who we are -for others and especially for ourselves.
So given that we are so committed to our own businesses and that success doesn’t exactly come knocking on our door but takes a lot of hard work, my argument is that an entrepreneur cannot afford the luxury of leaving money on the table and therefore, must make sure that her or his business is as profitable as it can be. This is super important because generating profits is the only way a business can create wealth for its owner or owners.
Generating profits is the only way a business can create wealth for its owners.
To understand why this is so important, let’s review a common mistake: obsessing and only paying attention to the top line.
Frank is a hard-working entrepreneur who started his business from scratch and has been successfully growing it. Sales and customers have increased substantially and maintaining that growth is where Frank focus most of his time and almost all his energy. And even though the growth of a business usually has a negative impact on cash flow (something that is not intuitive), Frank has managed to operate without the need for more debt or capital.
The problem is that Frank has not been paying much attention to profits and having enough cash to meet payroll and pay the bills give him a -potentially wrong- sense that the business is doing well, even though he doesn’t have reliable profit numbers to back it up.
Maybe Frank's business is profitable and he just hasn’t had the time to keep track of profits. Although it’s arguably not as profitable as it can be because he cannot eliminate potentially wasteful spending that has not been accounted for properly.
But perhaps the profitability is low and it is the other actors in his business who are doing well instead of him. Why? Because Felipe or any entrepreneur should keep in mind that if your business is not really profitable, you work primarily for the benefit of your customers, suppliers and employees.
If your business is not really profitable, you work primarily for the benefit of your customers, suppliers and employees.
If you don't sell, you won't be in business very long. And if you don't manage your cash flow properly, your business can experience a sudden death despite its sales. But I believe the worst case scenario is when the money coming in is sufficient to keep the business running but there's no clear evidence that it's profitable.
The key question to avoid falling into that trap is, ¿how can I reliably measure my profit (or loss) that my business had during any given period? And the answer is surprisingly simple: controlling its cash.
The problem is that you can get benefits and clear value from using software like ours without having to control your cash. You can, for example, create and send invoices, manage your accounts receivable and generate statements for customers, manage your price lists, check the history of transactions for each customer, enter all purchases and expenses, and manage your accounts payable. But if you don't do your cash homework -making sure what you have in the system is in sync with reality- you will never have reliable profit (or loss) figures.
If you agree with my premise that the key success factor in the financial management of your business is controlling its cash, the question that follows is, how can I do it without bogging myself down with minutia? In other words, what is the simplest and most effective way to introduce a cash control process that is sensible a has a "bigger" purpose?
Naturally, we believe that the correct implementation of our software in your business is a solid answer to this question because the focus of our product is management (not accounting) and our mission is to help our clients keep the finger on the financial pulse of their businesses with clear and up-to-date accounts.
If you can relate to Franks's predicament of being very busy but unsure of how well (or not) the business is doing, my invitation is to replace the stress of not knowing with the satisfaction of being on top of your business finances. But to be perfectly honest, I know my invitation will fall flat unless you are seriously bothered by not knowing.
Frank is unsure that his business is profitable but might keep going and kicking the can of getting her financial affairs in order. Laura, on the other hand, will not keep plowing without knowing what's going on and what to expect from her effort. She is no Scrooge but wants a fair share of the economic value created by her business. And she's always had the healthy feeling that if she's not careful, the banks and other providers of financing will suck the life out of her business.
She also believes it's her job, not her accountant's, to maintain clear and up-to-date accounts for the business so that she knows it's on the right track. She has an accountant to make sure the business complies with its fiscal obligations but knows that the information needed to run the business on a daily basis is not going to come from him or her.
Laura is not trying to outsource the financial control of her business or avoid the drudgery of having good processes and systems in place. She believes that sound finances and operations are the foundations for a successful business, not something to be avoided or abdicated to others. And understands that although this alone will not guarantee success, shaky finances and sloppy operations will almost guarantee failure.
Sound finances and operations are the foundations for a successful business, not something to be avoided or abdicated to others.
Can you relate to Laura? Do you feel the urge to make sure your business is as profitable as it can be? Are you unsatisfied with the tools you have now to make sure it is? If that's the case, it's very likely that our software is a good solution for you and your business.