Business is clearly more than just “show me the money.” But certainly, money is critical. As Henry Ford stated, “Business must run at a profit, or else it will die.” And John Mackey, co-founder of Whole Foods added, “Just as people cannot live without eating, so a business cannot live without profits.” So, how does a small business survive? It requires a continuing revenue stream, positive cash flow, and profits.
Revenue and Income
Sometimes the terms “revenue” and “income” are used interchangeably, but they are different. Revenue describes the outcome of making sales. Gross revenue is the total of funds earned from a company’s sales without taking any deductions. Net revenue is the amount of revenue left after subtracting any refunds, returns, or discounts involved in obtaining that revenue.
Net income is the amount of money produced from revenue after deducting business expenses and taxes.
External factors affecting both revenue and income include economic conditions, competition, consumer behavior, pricing strategies, marketing effectiveness, and operating efficiencies.
While it is vital to generate revenue to achieve profits, obtaining profits defines a company’s ability to pay its expenses, and invest in the future.
Can a small business survive without a consistent revenue stream and profits? No.
Cash Flow and Profit
Cash flow describes the money that flows into and out of a company during a specific time period while profits measure the money that is left over after paying all the expenses of the business. Positive cash flow means that a company can pay its current expenses. It is possible for a company to have positive cash flow and not be profitable, but the aim is to achieve both. Can a small business survive without positive cash flow and profit? No.
What is More Important, Profitability or Growth
Profitability and growth are both required for any business to succeed long-term. Profit is key to financial survival and growth is key to progress and long-term success.
How Long Can a Small Business Survive
A widely cited study conducted by the JP Morgan Chase Institute reported that half of surveyed small businesses only had enough cash on hand to support 27 days of business expenses without generating sales, receiving tax refunds, securing loans, or obtaining transfers from investors or owner’s funds. That points out the importance of both continuing sales activities and managing current expenses.
Of course, the “staying power” of company cash reserves depends on industry conditions. Restaurants typically have the shortest cash flow staying power due to the number of employees involved and real estate has the longest cash flow survival period, according to the study.
The standard forecast is that it takes two to three years for a company to be profitable so a small business must have funds on hand and create income to last to survive long-term.
How Will a Small Business Survive?
To survive, a company must increase its revenues, generate positive cash flow, and consistently work to achieve solid profitability.
Here are some helpful tips:
- Make time to develop a comprehensive business strategy which includes finance and marketing measures.
- Carefully evaluate and understand your competition. Learn what you should and should not do by “going to school” on them.
- Set specific and meaningful goals.
- Evaluate what is working and not working in your entire enterprise.
- Market to your current customer base and use hyper-local marketing. Find ways to encourage repeat business.
- Utilize e-commerce.
- Ask your employees for their ideas. They know their customers and they can help you operate more efficiently.
- Audit and obsessively control your expenses.
- Consider outsourcing functions that don’t drive revenues, like accounting, tax planning, and payroll.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.