Business Numbers that Matter

Jan 4, 2012   //   by admin   //   Blog  //  No Comments
“Turnover is Vanity. Profit is Sanity. Cash is Reality.”

This old finance proverb is known as “The Bankers’ Mantra” and while bankers may not have the credibility that they once did, this proverb identifies the two most important numbers for a successful business; Profit and Cash.

Business Numbers that Matter

 

Lets’ repeat that.

The two most important business numbers are PROFIT and CASH.

 

THE NOISE OF NUMBERS

When we prepare or evaluate tenders, business plans and projections, we often have to sift through thousands of numbers. It’s easy to lose sight of what is important. The fundamental reason for a business to exist is to make profit for its owners. That’s it.  All other numbers are a distraction. Noise. A business does not exist to build a community, provide employment, generate exports, nor to provide “economic diversity / viability” and certainly not to “underpin” anything whatsoever. These may be by-products of a successful business but they are not what define a successful business.

 

PROFIT

A business exists to generate wealth for its owners/ shareholders in the form of profit. Profits are extracted from the business in the form of dividends or drawings. A business owner may also realise a profit by selling the business. Profits are earned when the income of a business exceeds the expenses. Too simple? Well it may be simple, but many forget this in the race to increase turnover. Profit is sanity.

 

TURNOVER

Profit is often sacrificed for the sake of turnover. Managers with sales targets may resort to price cutting and careless practice in the pursuit of sales. Consider the crazy case of a production manager selling company tooling in an attempt to inflate turnover and meet his sales targets, and of course, increase his own bonus. (By the way, selling a company asset doesn’t count as sales…)  Even if you pursue “real” sales, make sure that the accompanying extra costs do not consume your profits. Or even your life. More than one business owner has been known to wonder at how their “successful” business means that they are busier than ever, but have nothing to show for it. Your business model may mean that you have to turnover a certain volume and value to make profit, but make sure you have properly evaluated that. Remember that bigger is not always better. Turnover is vanity.

 

CASH

A business needs cash to survive. You need to be able to pay the wages and salaries, your suppliers, the Revenue Commissioners (taxes), the banks, and of course to distribute your profit to the owners / shareholders. Your business may be profitable or on the road to profitability but if you do not have enough cash to continue to trade, your business will be unable to continue. Cash management is the simple art of collecting the cash that is owed to your business in a timely fashion and scheduling your payments. It is not a difficult task per se, but it is a challenging one, because your customers may be experiencing cash flow difficulties of their own.  Many businesses are so busily engaged in the pursuit of sales that they forget to focus on cash. When it comes to cash management, consistency and persistency are the only game in town. Cash is reality.

 

Turnover Is Vanity. Profit Is Sanity. Cash Is Reality”.

What business numbers do you value?

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