'Turnover is vanity, profit is sanity' - You've probably heard this snippet of business wisdom and as a bit of common sense there's nothing too awful about it, but it's missing the point. For most (all?) businesses the most important element is cash. Neither turnover or profit are an accurate reflection of cash status. You could be running a very profitable business but if your clients take longer to pay you than your suppliers demand you pay them then you have a potential problem. You might have a $200K order for widgets but until you get paid for that order you are in a deficit.
Of course you probably don't sell widgets - you are in all probability running a service or consulting business, but you don't get off ! - your costs may be your staff - they need to be paid monthly irrespective of how long your clients take to pay you.
Just an employee? .. okay, you may not be the one personally guaranteeing your company's borrowing or writing the salary cheques - but somewhere in your business someone is worrying about cash - so don't get too comfortable, in fact one thing I like about having a business is that if it all goes per shaped it's probably going to be my fault, having nobody else to blame is quite liberating (and terrifying in short bursts).
And if all of this sounds really simple, it is - that doesn't make it easy !
We once had a 7 figure order order for a product which required six figures of additional cash flow to deliver it. I thought securing this from the bank this would be a formality, after all we had a huge client ready to write me a big cheque, however I hadn't factored the risk averse nature of most banks. Where I saw only opportunity they saw only risks - what if we failed to deliver, what if the client didn't pay ... of course I'm an optimist, I have to be because I have my own business, so it was frustrating to encounter this very tight risk aversion, in fact it nearly killed us. Fortunately we found a way to fund the build ourselves so we were ok, but it was a reality check (again!).
I can still remember being astonished the first year I got accounts filed - I had no cash whatsoever in the bank but my accountant showed me a set of very profitable accounts (along with a sizeable corporation tax bill) , I now know the difference between cash and profit but even after 32 years of doing this stuff I sometimes surprise myself.
I'm not against profits or a healthy balance sheet - both are reasonable measures of company health over a period of time, but lots of profitable companies die because they run out of cash. It could be because they were too focused on one big project and overextended themselves, or maybe a big client simply took longer to pay than usual - the end result is the same.
So for Pisys it's all about keeping on top of debtors, keeping outlays as low as possible and keeping an eye on how much cash we have in the bank.
Credit cards are useful, and have been a lifesaver for us in the past- they're expensive but not nearly as expensive as some of the alternatives (like selling equity to get out of debt, which we've fortunately avoided ! ) - more on that in a future post !