[su_quote]Sales is vanity. Profit is sanity. Cash is reality.[/su_quote]

Leaking cash flow

I am regularly reminded of the importance of not focusing solely on growing revenue. Obviously sales growth is vital to a business. However, there is a real danger when a business grows rapidly….

Cash flowing through the cracks

When a business a grows quickly, the slight cracks in the systems of the business may become huge holes. If a pipe has a crack and water gently flows through a pipe, the amount of water that leaks is minimal. More of an annoyance and can be easily repaired. However, when the volume of water is increased the pressure is increased. This will cause the crack to grow and the damage to be greater.

A business that has failings in their systems will become magnified very quickly if it grows quickly. I have seen many times where it costs a business cash every time it makes a sale. The business is heading quickly to disaster and would be better to stop selling. For example, as the number of customers grow the business will try to satisfy the need of every customer. They will keep buying more stock – different sizes, colours, etc. With no system in place to control stock, all their money goes on buying stock they can’t sell.

What should a system do

Systems should be designed to help your business to focus on the critical functions. This will ensure your business does not get lead astray from its core values. E.g. selling products that aren’t part of your core business. If a system breaks down, it is easy for people to do what they think is right. While they may have good intentions, it may not be in the best interests of the business in the long term.

If your business is growing it is important you have systems to protect the extra money coming into the business. You will most likely have heard of the ‘lottery curse’. This is where the majority of the people who have won the lottery end up worse than they did before the win. I was listening to a financial advisor speak at a conference share how he was changing the focus of his business. He said over the years he had seen many of his clients become millionaires. However, now many were worse off than when they started.

I have seen the same happen in small business. A business will start reasonably well while it is small as a husband and wife operation. The hope to make more money drives the need to increase sales. Unfortunately the opposite happens. The more sales grows the less money is in the bank, the harder they work and the more stressed they get. The business ends up in a position worse than before the growth.

This is not to say you shouldn’t grow your business. Growth is important for every business. Here are 3 things you can do to protect your business and its wealth during periods of growth.

  1. Review your systems for effectiveness and efficiency. Higher sales won’t translate into more money if aren’t maximising your net profit with the current level of sales.
  2. Reinvest into your business. Take a long-term view and set aside some money to invest into the business. This could be training, equipment or staff.
  3. Save for a rainy day. Always have a little money put away for an emergency.

If your business has been growing you have been struggling with cash flow problems then contact a professional business advisor. The earlier you do this the easier it is to get things fixed.

Image courtesy of cooldesign / FreeDigitalPhotos.net