The flow of cash: keep it coming in regularly for what’s called “sustainable cash flow” in business. The principles for creating sustainable cash flow are useful for individuals as well as businesses. Cash is necessary to provide for our daily personal and business needs. The principle is always the same: if the money coming in is more than the money going out, you’ve got positive cash flow. If the money coming in is less than the money going out, it’s negative cash flow. In business, this means considering customers who pay you and vendors you pay. The simplicity of the concept may tempt us to believe one of two fallacies: first, that lots of cash coming in means “big profit”; and second, that slow cash flow means our products are not profitable. This is where we engage our basic mathematics to learn about sustainable cash flow. Everyone wants it; some understand how to strategically plan for it; and fewer exercise the consistent discipline to really make it work. As author Jim Collins points out in his book How the Mighty Fall, “Organizations don’t die from lack of earnings. They die from lack of cash” (2009). Anyone can learn the principles for creating sustainable cash flow and implement them starting today.
Cash Flow is Dynamic: Understand It
In order to produce gross profit, the cash flow must be sustainable and growing. When observing how much cash is coming in, it may be exhilarating until the moment when we see how much has to go out to pay bills. The skill to employ is the big picture overview and analysis. Budgets are built on this principle. There may be high volume of sales, with seemingly high volume of cash; however, if your financial obligations are greater than that sea of cash coming in, over time you’ll sink. And the dynamic factor in this is that no two months of income vs. expenditures are the same. What’s the answer? More volume of sales? Less expenditures? Possibly. But let’s look at profit.
Cash Flow and Profit: Not the Same
What about smarter, more profitable sales? Profit is important because it provides the money you need to re-invest in your business as well as expand. If products are profitable, does that mean we’ll have a sustainable cash flow? Not necessarily. An individual item or service may be profitable, but if the volume of those items or services is not enough and your bills are higher than what you bring in, you’re still stuck with lack of cash. This is how you can make a profit on items or services and still go bankrupt. Legendary leadership and management expert Peter Drucker said, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” The remedy is to understand how cash flow operates, and strategically design your processes to facilitate it. The pricing process is one area you can address immediately. Considering all the products and services you offer, do their individual prices reflect profit? Which products or services generate the most cash flow? Thinking about supply and demand, the most in-demand offerings that produce cash flow may tolerate an increase, creating even more cash. Or, the less in-demand offerings may tolerate a price decrease, stimulating more sales and more cash.
Cash Flow: It’s King
Yes, it is worth the investment of your time and energy to understand the mechanics of cash flow. As Jim Collins puts it in his book Good to Great, “All the good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability” (2001). Before doing anything else today, answer these questions:
-What is the product or service that generates the most cash flow for my business?
-What can I do right now to scale this product or service so that it generates even more cash?
-Could I discontinue my least revenue generating products or services in order to redirect the time, effort, and finances invested in these less fruitful endeavors toward my #1 revenue source?
Thriving businesses generate sustainable cash flow by understanding exactly how the business creates revenue and by enlarging that economic engine to care for employees, care for customers and, in doing this, care for the business.
About the Author
Dr. Renée N. Hale is Lead Consultant at WellSpirit Consulting Group, Inc. WellSpirit Management Consulting provides custom company/organizational management solutions, individual leadership coaching and stand alone workshops. Located on the 84th floor of the Willis Tower, Chicago. Call (312) 283-8020 to schedule an appointment today. To join the Business Worth Living community, use the sign-up form on this page to receive our weekly Business Worth Living newsletter.