Revenue, Profit, Cash Flow and your Business' Financial Health
Building your business is not easy. Every small business should have accurate and timely financial information to plan and steer decisions effectively. We have compiled a list of three key financial components that if understood and managed well, can help increase the probability of success for your small business.
Let's begin discussing revenue, profit, and cash flow and the role these have in your business.
1. Revenue
Revenues are the key economic engines of any business. These are essential to generating profits and the cash necessary for your company to survive in the long run. As a small business owner, it is critical to focus your energy on growing your revenues and adding value to your organization.
Strong revenues have intangible benefits that are often overlooked. Strong revenues can provide support for a number of strategic growth initiatives, such as business expansion into new products or regions, headcount growth, or investment in new technology. Additionally, revenue growth can project strength to your suppliers and stakeholders, which can lead to opportunities for realizing volume discounts or additional funding from investors. Savings from volume discounts or new financing can be used to double down on growth.
From an accounting perspective, financial insight into inputs that drive your revenues is crucial. It is your fundamental duty to your business and your stakeholders to make decisions based on reliable information. Accurate, timely and complete financial information form the basis to guide long-term business planning. Rolling revenue forecasts adjusted monthly or quarterly help to ensure that your business remains on the right path to success.
2. Profit
Revenues are exciting, but it is important to build a profitable operation from your revenue. Profitability is a key metric that provides a good indication of the overall health of the business. This can be achieved by benchmarking and at a minimum, maintaining positive profit margins.
There are various measures businesses can pursue in order to target profitability. For gross profit, regular analysis of your product lines should be a performed to ensure cost inputs are being controlled and profits are being optimized. From a net profit perspective, streamlining your business’ processes and automation are key initiatives that can contribute to overall improvements in the efficiency and cost-effectiveness of your business operations, and increase profitability.
Let’s face it, we always need to be cognizant of the bottom-line. For most small businesses, revenue growth without profit is simply a downward spiral to the dreaded plan B or C.
3. Cash Flow
Cash is king! Or as we like to say, working capital is king! We will discuss working capital in a future post. Our focus today is on cash flow.
Cash flow is the difference between the total inflow of cash netted against the outflow. Positive cash flow is directly related to a business’ ability to effectively organize, plan and manage its cash flow. A common mistake many small business owners make is thinking that profit equals cash flow. This fatal error ignores the significance of the timing of cash flows on a business.
As a small business or a start-up, cash flow is most critical when you are first starting your business when expenses are high, and revenues are generally non-existent. Preparing cash flow forecasts for the next twelve months is good practice and will help with cash management at this early stage of your lifecycle.
If you are already generating revenues, there are a number of strategies that you can implement to give your cash flow a boost. First, regularly update your cash flow forecast for changes in assumptions and manage your cash diligently. Second, collect your credit sales as fast as you can. The faster your accounts receivables turnover, the quicker your small business will generate the cash to pay suppliers, employees, and inventory. Finally, maximize the credit terms your vendors extend to you by paying on the last day possible.
Revenue, profit, and cash flow are critical to the success of every business. These three financial components when considered together with planning and effective stewardship are key to the financial health of your small business.
