Why are you in business? Is it because you couldn’t get a job? Or, is it so you can sell it?
In his excellent book E-Myth by Michael Gerber (I recommend all business owners read this book), Michael points out that the primary reason for starting and building a business is to one day sell it. If he is correct in his hypothesis, and I must say that I agree with him, then you need to look at some of the factors that make your business valuable.
One of the most dominant factors that make your business valuable is sales growth. As I have pointed out in previous posts, this is also the most dominant driver of cash flow in your business.
Lets have a look here at how sales growth impacts cash flow of your business.
Sales growth influences cash flow in two ways, namely, via the growth effect and its effect on the management decision to handle it. Sales growth has an impact that is relative to all other revenue generating activities that figure on the balance sheet or income statement within the organization. How the management (or in a small business you, the owner) optimizes and facilitates rising sales figures – perhaps through better credit terms or other changes within the marketing and promotion function will further have a great influence on cash flow. As a result, management has the challenge of tackling any operational issues that may arise in the process of rapid growth (hyperactive sales growth is possibly the fastest way to run out of cash, and likewise sluggish sales will also send you out the back door – literally).
It is well known that any change in the balance sheet is a result of sales income. In the income statement, changes filter down from revenue as a first step. The cash flow statement reflects the amalgamation of the balance sheet and income statement. It therefore makes sense to get to know how costs are structured within the company, in relation to the industry to which the business belongs. This helps to make the necessary changes that are required to make things better. For instance, someone from the marketing function would benefit from an awareness of the importance of cash flow and cash drivers that determine the company’s success. By broadening one’s focus, a better understanding can be achieved of the bigger picture, which is the organization as a whole, rather than the department within which one operates. From an owner’s point of view, knowing how each function within the business impacts cash flow is vital in keeping the cash position of the business on an even keel. You would be surprised (actually possibly not) at how many business owners have no idea the multiplying effect small changes to different parts of the business can have on the overall cash position of the business. Only a few days change in the number of days receivable can put a huge amount of strain on the working capital requirements.
As a matter of fact, sales growth does not occur magically. Revenue growth is a planned process that takes place as a result of analysis and decision making by the management (or you the owner). These decisions are thereafter implemented to result in sales growth. The decisions could do with the introduction of new products, expanding to new markets, new staff and training programs, additional promotional campaigns, better customer service, better pricing, logistics etc. All of these, which combine to form the marketing mix involve a lot of planning at the top level in the company in addition to a lot of expense. This expense is because of the extra resources required in the form of assets and other direct expenses. Apart from the initial investment, the business will also need to keep investing cash for more inventory and accounts receivable since there will be sales growth.
The overall point I am trying to make here is that if you want your sales to be growing, and indeed we all do, you need to plan for growth.