Profit is vanity, cash is sanity ...

OK .. so you might have heard the phrase:

Profit is vanity, cash is sanity

But what does it ACTUALLY mean?

Over the years there have been many household name businesses failing and collapsing .. and it has often come as a massive shock to the general public, it is the lack of cash and the lack of finance that has killed them despite the fact that on the face of it they would appear to be profitable businesses. 

Profit is essentially sales less costs, these costs will be the cost of that sale and also the overheads and general costs involved in running your business on a day to day basis. 

But, this doesn't equal cash .. cash gets spent on "things" for example assets within the business (tools, equipment, desks, chairs, IT equipment etc), it gets spent on stock.  It also gets "locked" within the business and by this I mean that unless you are selling to the general public then your sales are invoiced and you then have to wait for the payments to come in .. how long this is depends on what terms you offer and also how long customers actually take to pay. 

But you will also owe money too .. you need to pay your suppliers, your staff etc. In the example below, on the left the business is making money but has no cash, in the example on the right they have doubled their business and their profit .. fantastic! But they've invested this extra profit into their stock and doubled that too but debtors have run away with them and increased from £10k to £25k .. people owe them more money .. the impact is actually a decrease in cash of £15k .. they are now in the red and it isn't looking good.

OK - this is a simplified example, for starters doubling your turnover without increasing your costs is incredibly hard to do.  But you get the idea .. as you grow, the demands on your cash get bigger and it becomes easier to take your eye off the ball .. did you actually need to double your stock? should your debtors have been allowed to get slower at paying you? 

So back to the original quote:

Profit is vanity, cash is sanity

Cash is what keeps a business alive and keeping a close eye on it and what you are doing with it is essential, controlled growth is key. Profit is nice (obviously!) but without cash you won't have a sustainable business.

Any questions or if you would like to talk about how to manage your cash better then get in touch. 

Rachael Savage