For your business, revenue is a vanity metric. Cash is oxygen.
Have you noticed that your business profit never equals your cash? Profit is a deceiving metric. So is revenue. It is common for ecommerce companies to run out of cash, even though they are profitable. This is because the cash is often locked up in inventory. Take this hypothetical company, for example:
$235,000 Gross Profit for the year
$200,000 Inventory Increase for the year
$50,000 Accounts Payable increase for the year (to buy all that inventory)
($15,000) Negative Net Cash Flow, which was probably financed via a credit card
This company has a cash flow problem, even though the business is profitable.
Many companies have an “Accounts Receivable” that can even make matters worse. Like in this hypothetical example of a “growing” company:
$400,000 Gross Profit for the year
$200,000 Inventory Increase for the year (because the company is growing)
$225,000 Accounts Receivable (this company sells on credit, which fueled it’s “growth”)
$75,000 Accounts Payable increase for the year (to buy all that inventory)
($100,000) Negative Net Cash Flow
This company is in *serious* trouble, even though the gross profit is really good.
Your cash is locked up in your balance sheet, and it is *cash* that is needed for the company to survive. Cash is oxygen. And it is only indirectly related to profit.
There was a time when Bountiful Baby allowed a small number of customers to buy via “credit” on account. Thus we carried an Accounts Receivable. To manage cash flow, we discontinued that practice long ago.
Similarly, we do not carry an “Accounts Payable”. We always pay everything immediately. One thing we have found with this policy is it keeps us on better terms with our vendors, which sometimes makes them more willing to help us if we need a special favor. It also reduces our overhead, which lowers our costs.
Look at your numbers regularly— at least weekly. At Bountiful Baby, I developed the habit long ago to do this every morning as my first task of the day. I reconcile our bank account and our business credit cards every morning, and analyze the cash flow at the same time.
The things we put on sale are controlled by three things: (1) the cash flow that we need at that time, (2) the need to keep the employees busy, and finally (3) as a mechanism to move old inventory. Of those three, the third one has been the least important for us. It is the one that barely effects what we put on sale. The other two have been king. But I am hoping to reverse that, so that the sales mainly only happen for #3.
You need accounting software, otherwise you are flying blind. And, revenue is a vanity metric, while cash is oxygen.