How to Buy Materials for $1 Sell them for $0.95… and Survive

This is ultimately a recipe for business disaster and bankruptcy. However, you can survive doing this for years as long as your company keeps growing.

Here’s the story:

Two partners start a business. Each year, the business increased its total revenues. After 12 years, the business had reached $2 million in revenue.

They never paid attention to the financial side of their company. They felt that as long as they had cash in the bank to pay their bills, payroll, and take their discounts, they were happy.

The partners did not pay attention to profits or look at the tax returns that the accountant compiled from their financial statements. When the accountant asked them for their inventory value, they guessed. They did not have a clue what it really was.

The only thing that mattered to them was that they had enough cash to operate and do the things they needed and wanted to do.

When the company hit $2 million in revenues, growth stopped. Soon problems began to appear. Occasionally they could not take their discounts. They did not always have the cash to make payroll.

They knew something was wrong. After all, they grew the company to $2 million in revenue without problems. Why, now, at $2 million, were they having cash flow issues?

They were smart enough to get help. I analyzed their financial operations and determined that they were losing a nickel for every dollar they took in the door for 12 years.

Because it was “just a nickel,” the cash flow masked the problem since cash increased as the company grew. Since they never paid attention to profits and profitability, they never knew the company was unprofitable. The cash received from one project funded the next. As long as the number of projects kept increasing, the increasing cash flow kept the company alive.

When growth stopped, the lack of profits was exposed: lack of proper cash flow due to prices being too low, at least a nickel too low.

What happened? They raised their prices 10%, started earning a profit, and generated positive cash flow. The company did not lose customers. In fact, many wondered how they could provide the quality of work they did as inexpensively as they did.

Cash matters. Profit turned into cash matters more.

How financially fit is your business?

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