Sales Don’t Pay the Bills

I wasn’t going to write about cash flow again for a while, but I recently received an email taking me to task for saying in a prior article that “Sales do not pay bills—cash does.” The writer’s point being, that if you don’t have any sales, you won’t have any cash.

And, of course, that’s true—up to a point. When your business is humming along and making a lot of sales and profit, the profit can be used to help make more sales, which makes more profit, which makes more sales, which… you get the idea.

Shocked woman with unpaid bill

This concept works perfectly well in a classroom, but unfortunately, the classroom is a very long way from the real business world—and that comes as a shock to many new business owners.

To understand this better, let’s take a look at a fictitious example of the reality of a newer micro business entrepreneur in cash flow trouble:

Mary had always wanted to start a small women’s boutique. She had an entrepreneurial spirit, a fine eye for fashion, and some money saved up for her “business fund.”

Also, Mary had taken some business classes, so she had some understanding of marketing, inventory, customer relations, and so on.

Mary found a great storefront location in an upper class neighborhood, and she found a local Angel Investor that would provide the capital she lacked to get started. Mary was on her way to becoming a successful businesswoman.

Like all startups of this nature, the first year was challenging. She had to remodel and decorate her store, acquire fixtures and furniture, purchase a substantial initial inventory of merchandise, hire and train sales people, oversee the development of a marketing program, and install an infrastructure to pull everything together.

At the end of the first year, Mary was very pleased with herself; she had a new business up and running, paid herself a decent salary, and even made a small profit that year.

The second year was even better. Mary constantly added new lines of merchandise to her store, and sales increased. She did some minor expansion of her store, and sales and profit increased.

The third year was full of more activity, and her sales and profit continued to grow.

Then—it seemed like all of a sudden—during that third year, Mary started to get phone calls from some of her vendors and suppliers, reminding her that she had payments past due. Her bookkeeper informed her that the landlord and some of her media accounts were also calling about past due payments.

Shortly thereafter, Mary got a call from her Angel Investor, who said, “… we need to talk.”

During this “talk,” her investor showed her a “Financial Health Report” on the financial condition of her business. (For more information on how to prepare a “Financial Health Report” for your own business, refer to one of my prior articles, titled “Profitable—and Failing”click here.)

Mary had worked so hard building her business and increasing her sales, she had not realized she was building it on the backs of her creditors.

Much of her expansion of merchandise inventory, marketing and promotional costs, decorating costs, and the like, were not paid for entirely from investment money and cash flow, but rather from debt—money owed to vendors and suppliers.

From a cash flow standpoint, Mary’s business looked like a failure.

————————————————————————————————–

Well, what could be wrong with Mary’s business? The place to find this answer is on her Balance Sheet (this is why up-to-date financial statements are so important), where we check out the following items:

  • Accounts Receivable. This is important because this number represents sales that were made, but not paid for.
  • Inventory & Accounts Payable. As inventory grows, so does your Accounts Payable—and vendors expect to get paid whether you sell the merchandise or not. I will mention here that “inventory” is a major headache for all retail businesses, manufacturers, distributors, contractors, and the like.
  • Depreciable Assets. Things like leasehold improvements and equipment are Balance Sheet items that usually require payments to be made that are not reflected on the Profit & Loss statement.

These things—and perhaps others as well—all require cash payments to be made that don’t directly impact profits… at least not until you begin to write off uncollectable receivables and obsolete (or lost) inventory.

————————————————————————————————–

So, Mary sat down with her investor and they went over the things she had to do to save her sinking business and get back on track running a successful business. (If you are having cash flow problems, I suggest you read about the things you need to do, in another of my articles, titled “The Secret to Improving Your Cash Flow”click here.)

* * * * *

Well, we’ll assume Mary learned the difference between Sales, Profit, and Cash Flow, and went on to become highly successful… most profitable businesses do.

But, what about your business—do you have a cash flow problem? If so, I recommend you go back and read the two articles referenced above, then apply that information to your own business. You might be surprised.

If you have ever had a cash flow problem that you worked your way through, let us hear how you did it.

*

Leave a Reply

Your email address will not be published. Required fields are marked *