Cash is King -Yes, But Not at Any Price

I was reminded the other day how people can get so focused on a mantra that they lose sight of context. Yes in a tough market Cash is King but not to the detriment of everything else.

Cash Is King

Let me explain, I was having a discussion with an internet business owner who was moaning about poor sales, and the fact that to get cash in he needed to reduce his margin. The more we talked the more I began to question the strategy of reducing price to get the cash in. His response always started with "well you know in these times Cash is King... 

Eventually I got him to show me an example of how this worked for him. Once he had finished I asked him a question "Ok, so if you are giving away margin, are you making any profit at the reduced level?" 

"Well that doesn't matter what is important is to get some cash in to pay suppliers and re order product." came the response.

"But surely if you are losing money on each sale getting the cash in, you are making the situation worse, not better. " 

"At the moment getting cash in is whats important"

"How regularly are you doing this? Is this just to clear dead stock for example?"

"Quite frequently because when we put our products out at full price we are losing sales to cheaper providers so we use this to strategy to get the cash in"

At this point I was getting a little concerned, "But surely you must know if you are making a profit otherwise you will only be building up bigger and bigger losses, after all if you are only losing £1 per item if you sell 1000 of them you've lost £1000!"

"Yes but if you don't get the cash in when you need it you can't pay suppliers and they put you on stop"

We were in danger of getting into a circular argument, so I suggested that if he wanted we could look in detail at his pricing to see if he was making the situation worse or better. What we discovered subsequently was that he was indeed making a loss on his reduced items but more worryingly also on some of his regular priced items, and that his dedication to blindly follow the Cash is King mantra was killing his business.  

So the moral of this story is yes "Cash is King" but getting cash in is only worth pursuing if its in the interests of your business. I do appreciate that there are times when you may make a loss sometimes; for example if you are off loading poor moving stock, but generating cash flow by cutting your margin without understanding the consequences of your actions is a dangerous strategy.

Exigent Consulting provides specialist services for High Growth Business , Business Turnaround, and Mentoring to the Small and Medium Business. We help Business Owners improve the profit performance of their business. 

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Manage For Growth or Profit Not Both

There’s a simple rule which says that you can either manage your business to maximise profits or you can price for growth. You can’t do both. This simple rule is misunderstood by many business owners, because they fail the relationship between bottom line growth (profit) and top line growth (sales).

Managing your business for growth means actively planning to grow your business, to do this you’ll need to get your resources; people, product and organisation ready to support sales growth, but each of those three areas have a different time lag between the decision being made and the results implemented. Let’s look at a simple case of recruiting a member of staff. Let’s assume that he’s paid monthly, that generally means a month’s notice before he can start. We also expect that the selection process takes a month. So we need to start the process a minimum of 2 months before we think we need them. If that person also needs training or familiarisation then we need to add that time on so let’s also assume it takes 1 month to bring them up to speed. Our decision point is now 3-4 months ahead.

This time lag also increases the risk, as we have to be confident that our sales will be at a level where we need this person or at least close to it. When driving for growth these decisions like this are taking place right across the business. This typically results in resources being pulled in ahead of time so that they are in place to support growth, which in turn increases costs and so reduces profit. Supporting high growth requires a detailed understanding of the mechanics of your business and the marketplace in which it operates. This detailed knowledge needs to translate itself into a comprehensive financial forecasting model on which to assess the performance of the business as a whole and its individual components. It also requires a degree of risk taking that many owners don’t want to take for fear of getting it wrong.

Pricing for profit is taking the view that we maximise the performance of each component of the business before adding further investment, whilst this has the advantage of having the business run efficiently it puts a cap on growth because resources are only acquired after its it certain that they are needed rather than in anticipation of their need. We therefore assume that pricing for profit is better since were making, or at least should be, profits at all levels of turnover.

In real life things aren’t so simple. Profit and growth are two ends of a see saw, businesses need to decide for themselves where the balance point falls as the trade off between them will be a function of many things including management strength, funds available for investment, market characteristics, risk aversion of owners/directors.

The truth is that pricing for profit tends to be adopted after the business has gone through its growth phase, although many businesses suffer low growth not because they’re pricing for profit but because they’ve hit the limit of their management capability, which of course is another story completely....