Turnover is vanity…cash is reality.

June 18, 2014 12:44 pm Published by

The vast majority of businesses are small businesses. The Government has said that it will be these small businesses that are the power house of the recovery from recession and getting the country back into growth. At long last this boring recession seems to be on the way out and business owners everywhere are giving themselves a shake and wondering what part they can play in the business resurgence. Is it time to grow your business model and make sure you are not left behind?

If you have a small business, growth may sound like success. But beware, think hard about what makes a business a successful one, because the old saying is as true as ever in these days of tight credit availability: ‘Turnover is vanity, profit is sanity, but cash is reality.’

It’s worth saying again: Turnover is vanity, profit is sanity, but cash is reality. Never were truer business words spoken. Turnover for its own sake is vanity – often, dare I say it, male vanity – but nothing in a larger business guarantees a larger profit. Businesses do not often die for want of size; what starts as a good small business often dies because of size if scaled up, because the cash is not there to cover scaled up costs. Cash flow is the usual cause of commercial death, and the certainty of future profit does not save a business that has run out of cash with which to pay its current costs. That is why boring cash forecasts, prompt invoicing and tedious debt chasing are so necessary: to make sure that cash is reality and there to be used.

Increased profit is usually preceded by increased risk. Costs get scaled up first, before increased income is realised. Whatever the scale of organisation, cash has to be there to cover the gap between current liabilities and the costs of doing work and the time when payment comes in. A common scenario is where a small business scales up and just assumes that profit will be scaled up too. There has to be a good reason for certainty that the increased demand for the goods or services is there, so as to justify the increase in overheads, or payment never will come in. The most important precursors to business growth are understanding and controlling cash flow, and being sure that the demand out there justifies the investment in provision. Get those two factors right and you will be well on the way to successful growth.

If you do decide to try to grow, good luck. Every large business starts small, like children and trees. Some succeed. Some stay small and succeed very well to scale. If you are looking at growth make sure you remain one of the successes by bearing in mind the even shorter business advice: ‘Cash is King.’

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This post was written by Frances