By: Ruth King
Despite my warnings, one of my clients had to get to $2 million in revenues…no matter what. He had it in his head that he had to have a company that was generating at least $2 million a year. The reason? He couldn’t give me one. This was not good.
My client made it: $2,046,000.
The cost? Strained cash flow, unhappy customers, and incredible stress. He had to empty his savings account to stay afloat in the first quarter. Not a fun place to be. However, that is why you have a savings account…for those times of cash need.
He grew. However, he didn’t grow profitably. As his sales volume increased his gross margins didn’t. He was growing so fast that mistakes happened. Customers got the wrong products, damaged products, etc. Supervision also became a problem so productivity decreased. Yes, the sales came in. No, the profits didn’t.
What comes in is important. What you produce accurately is even more important. Critical is what you keep after all of the expenses are paid.
I’m all for growth, if that is what you want. Growth by the rate of inflation each year is mandatory to keep even with respect to sales and profits.
How much cash do you need to grow? The rule of thumb is 10% of the increase in sales. If you want to grow from $1,000,000 to $1,500,000 you probably need about $50,000 in cash to fund that growth. Make sure you have it or can easily get it.
My client found that $2 million and no profit wasn’t a fun place to be for him. He grew quickly but it was cash draining and stressful. This year we are scaling back, looking at generating a good bottom line rather than more sales. Profits and cash flow are increasing. And, we are planning to pay back the savings account over the next 9 months.
Remember, volume is vanity. Profits are sanity.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.