Profit Is a Theory. Cash Is a Fact.

Cold hard fact:  More than 90% of American businesses will fail in their first ten years of existence. What are nine out of ten doing wrong? According to Bill Carmody, founder of the successful digital marketing company TrePoint, the number one reason is simple:  They can’t pay their bills.
As Carmody writes:  “Profit is a theory. Cash is a fact.”

laptop-900646_1280Most entrepreneurs don’t start businesses with a strong background in accounting; they have an idea that can make the world a better place, and run with it. According to Carmody in a 2015 blog for Inc., “most CEOs are trained to focus on the profits or EBITA of their businesses. After all, it’s what you are taxed on and how your business is evaluated. But profits are simply a snapshot in time. They are a theory because a number of factors determine if you can actually pull the cash out of the business.”

Particularly in our post-recession economy, entrepreneurial companies are living on the edge by trying to do more with fewer employees. They outsource whenever it makes sense, and pay their vendors quickly to build loyalty and trust. The problem becomes when large customers choose to pay in 45 to 120 days. As Carmody writes, “unfortunately for many small and medium sized businesses, entrepreneurs end up financing their clients who are ten times their size.”

If you own a small or mid-sized business, chances are you know this is true. According to a report by the National Federation of Independent Business (NFIB), 64% of the small businesses surveyed acknowledged having clients who don’t pay invoices for at least 60 days.

In a 2014 article for The Huffington Post, Jamie Sutherland, General Manager of U.S. Products & Solutions for cloud-based accounting firm Xero, recommended these tactics for building positive cash flow:

  1. Agree about payments and terms ahead of time.
  2. Send invoices as quickly as possible.
  3. Create clear, easy-to-understand invoices.
  4. Be assertive when invoices become past due.

 

Ultimately, as a business owner, you want to position your company as a key resource for your customers, rather than as just another vendor. By establishing a partnership built around mutual objectives, you build a foundation of understanding and mutual respect. When relationships exist to help both parties achieve success, timely payment of invoices – and your financial sustainability – becomes a lot more important to your customers.