As if you need to be reminded, businesses fail because they run out of cash. They may still be profitable but don’t have any more cash in the bank. One reason may be because month-by-month they are spending more than they are receiving to fund growth. Growing too fast without the cash or the support of shareholders can kill a business. See the butt on creating the conditions for growth.
Making a profit is important. First you look at the gross profit (£) & gross margin (%) you’re making; this is the difference between the cost of the product you’re selling and the price you’re achieving for it, including any payment discounts. If you’re selling a service, you may not have a ‘product cost’ and so your gross margin may be very high, maybe close to 100%.
Then you look at net profit, which is your gross profit minus your discretionary expenses – salaries, marketing, transport, sales costs, travel, warranty, servers, IP and more.
If your net profit is positive, all well and good. If not, you have a few choices:
1. Reduce your discretionary expenditure.
2. Increase your sales volume.
3. Increase your prices.
4. Reduce your product costs (difficult if you are making 100% margin).
Cash and profit are not the same thing, and you need to get to a position where you have more cash coming in each month than going out. Being profitable will help you, but it’s not the whole story. See the butts on cash flow and runway.
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