Cash sustainability is one of the most crucial goals we emphasize to our clients. To drive home the importance of what I call “hoarding cash,” I often refer to a few common phrases. Here are three key phrases that can help ensure your business remains sustainable:
- “You Can’t Pay Bills with Profits”
Why is this true? We often see companies with impressive profits, but they struggle with cash flow. This can happen because of high loan repayments or rapid growth that ties up funds in accounts receivable. Despite showing healthy profits, these companies may find it challenging to pay bills or meet payroll. Don’t fall into the trap of thinking that profits alone will sustain you in tough times. Only cash can do that.
- “Revenue is Vanity, Profit is Sanity”
These two comments go hand in hand. Getting caught up in the desire to grow revenue is easy, but if your product or service costs more to produce than it sells for, you’re losing money. Don’t be fooled by increasing revenue; focus on your bottom line. Are you getting the profit you should based on your revenues? A helpful rule of thumb is to aim for a 30% net profit on your revenues. While this can be challenging when starting; however, with a dedication to managing expenses, it is an achievable goal over time.
- “Cash is King”
Isn’t that the truth? More important than revenue or profit, cash is what will sustain you during lean times. Make cash king in your business by striving to have six months of fixed expenses in cash reserves. This will help you weather any storm or seize opportunities that come your way. This will also allow you to take advantage of an opportunity that may only be available to you if you have the cash to spend.
Conclusion
To ensure your business remains sustainable, focus on three key principles: “You can’t pay bills with profits,” which highlights the importance of cash flow over profits; “Revenue is vanity, profit is sanity,” emphasizing the need to prioritize profitability over mere revenue growth; and “Cash is king,” underscoring the necessity of maintaining sufficient cash reserves to navigate tough times and seize opportunities.
I hope you found this blog helpful. We look forward to sharing more insights with you in our next post! As always if you have questions or would like to inquire about our bookkeeping services, Contact Us today- we are here to help!
