Profits, Growth and Cash Flow – Which is Most Important to Small Business Success?

Business growth and profitability. Most entrepreneurs would consider these to be the Holy Grail of business ownership. So it’s not too surprising that many participants in the financial workshops I lead are surprised when I tell them that instant profits and rapid business growth aren’t always a cause for celebration.

“How can this be?” you might be wondering. The best way to explain it is to tell the story of the Wonder Widget Company. Haven’t heard of them? Well, this is a fictitious company I made up to help me explain business financial concepts in an easy-to-understand way.

A Hot New Launch

Wonder Widget Co. launched last year with $100,000 in cash and the hottest new product in its market, the amazing Wonder Widget. It was so hot that the owners had sales and profits the very first month of operations. So they quickly leased and outfitted a factory, production equipment and furnishings (all with minimal initial cash outlay), bought materials, hired workers, and manufactured and shipped widgets. Then they mailed invoices totaling $50,000 to customers in the first month. Amazing!

They paid their bills as they came due and collected from customers in the normal course of doing business. Meanwhile, sales continued to grow, increasing by $50,000 every month with no decline in margins and no serious competition, and profits climbed without a pause.

But a strange thing happened on the way to the bank: The owners were shocked to find that they didn’t have enough cash to pay their bills. Soon, they couldn’t buy any more raw materials to manufacture Wonder Widgets or make their payroll. Instantly profitable Wonder Widget Co. was insolvent six months after they opened the doors.

On the surface, it’s hard to see how something like this could happen to a profitable and growing business. But when you dig a little deeper, it becomes clear that there’s a whole lot more to running a successful business than just profits and growth-namely, cash flow.

The Cash Flow Cycle

Understanding what happened to Wonder Widget Co. starts by understanding what’s known as the cash flow cycle. This is the time lag that exists between when cash is paid out by the business for things like equipment, raw materials and salaries and when accounts receivable are collected. In manufacturing, the cycle usually consists of converting cash into raw materials, finished goods, receivables, and then back to cash again.

At the beginning of the cash flow cycle, nearly every business starts out with-you guessed it-cash. But from that point on, the central purpose of the business is to convert that cash into other kinds of assets or to leverage or extend it with liabilities, and ultimately to turn it back into cash again-but this time, more cash than the business started with. This process continues indefinitely and simultaneously throughout the life of a business.

When the company started up, its first activities revolved around setup-renting facilities, getting phones and utilities installed, etc. At the same time, it was purchasing assets so it could start operations. These included office equipment, computers and the like. Of course, the company also needed employees to answer phones, run the office, and produce and sell Wonder Widgets. The owners financed some of these costs, but obtained credit via bank loans to cover most of them.

With all this in place, the company was ready to begin production, or the manufacture of Wonder Widgets. Unfortunately, the process consumed even more cash: wages, taxes, sales and marketing, more raw materials, and so on. In fact, this is the period of greatest cash consumption for most companies, as they are in full production mode but no cash is coming in yet.

Finally, Wonder Widgets was ready to sell its products and begin the process of recovering all the cash it has been spending (or investing) in the business. However, while sales were brisk, they were made on “net-30” day terms, which means the company won’t actually receive cash from these sales for another 30 to 45 days, at least.

To add to the challenge, growing sales means the company had to buy more raw materials than they did the first time around. Since they were selling more each month than the prior month, they needed to not only replace inventories consumed but also buy additional goods to satisfy their growing sales demand. Purchases can actually exceed sales in such a fast-growing environment.

Collections are the final step in the process. While this might seem like a minor activity in comparison to production or sales, it’s actually the most critical task in making every other step pay off. Unfortunately, it’s the step that many businesses, including Wonder Widgets, neglect-and that leads to their ultimate demise.

Don’t Give It Away

Are you starting to see how Wonder Widgets failed despite having strong profits and sales right out of the gate? Nolan Bushnell, the founder of Atari and Chuck E. Cheese Restaurants, put it this way: A sale is a gift to the customer until the money is in the bank. This final step is the one that turns the entire effort-setup, purchasing assets, hiring employees, obtaining credit, and producing and selling products-back into cash again.

At this point, the answers to some important questions will begin to surface, like: Did the company ultimately make a profit on its business activities? Did it plan adequately for the working capital it would need to finance the cash flow cycle in it’s entirety? As the Wonder Widget story makes clear, answering “yes” to just the first question isn’t enough to ensure business survival. There are three key takeaways from this story:

1. Fast growth is a double-edge sword. Fast-growing companies need more working capital than those growing more slowly or not at all. When incoming cash flow is delayed while fixed costs continue and paydays come every week, there’s a limit to how long a company can operate comfortably, even if it’s profitable.

2. Cash flow needs must be forecasted months in advance. This is especially critical during the early months of a startup. And cash flow results must be tracked separately from profits.

3. Business goes with the flow. The health of a business depends on the health of its cash flow. As Wonder Widget Co. makes clear, more businesses fail due to a lack of cash flow than a lack of profits.

What Are Interactive Apps and Widgets?

We live in a world today in which internet has exploded tons of information which can be accessed with the help of certain man made application programs by the names of interactive apps and widgets.

Interactive apps essentially speed up business processes to a great extent. These are development tools with which a developer creates internet applications. Some examples for interactive apps are Flash, Adobe etc. which help to increase web traffic to specific sites portraying state of the art technology.

In addition there are interactive apps that can be customized according to the needs of the user to share business intelligence. These multipurpose apps are called Dashboard applications. These contain tabs that help to share reports on any network.

Interactive apps and widgets have in fact brought the world closer through the World Wide Web. With the help of these online applications, it is now possible to see and learn the contents of any extensive course from any institution or university of your choice located in any part of the world.

Widgets are applications into which chunks of codes have been embedded into. They can be placed in any third party site which allows the user authorship rights. You can locate plenty of them on social networking sites like Facebook, Orkut etc. Suppose you want stock updates on your homepage in your website, a stock update widget may be placed on a web page and clicking on it will get you the latest in stock prices directly from a stock market site. It’s also possible to access the same data from another location by simply copying the embed code and pasting in the site of your choice.

There are mainly two types of widgets namely web widgets and desktop widgets. It’s the web widgets that are extensively used in SEO processes not to leave out back link campaigns. Widgets are developed using software programs such as JavaScript, HTML, Flash etc and function as downloadable applications. They are generated by widget engines like Widget Box, Snack Tools etc. Desk top widgets on the other hand can be embedded in local computers only. For example: – Apple Computer Widget.

Today there are numerous widget companies offering various management tools for controlling these embedded applications. Their use has become so widespread that you can even find them inside mobiles which are known as mobile web widgets.

Google Gadgets, Yahoo Widgets & Myspace Widgets – Social Media Marketing On Demand

Remember the film “Field Of Dreams” and the tagline “If you build it, they will come?” Well, the same goes true for a Google Gadget, MySpace Widget or Yahoo Widget. Social Media Marketing and Viral Marketing are the crux of the online industry. Create a great looking website, fill it with informative content and useful information and viola – you have something that people will want. Something people will even be willing to pay for.

The trick is to get them to see your website. This is where viral marketing and social marketing come in. It is amazing what a few simple tricks that you can learn on the internet can do for your business. Creating a Google Gadget or a Yahoo Widget is not difficult at all. These are little bits of code that can be implanted in text. Because they are attractive little photo codes, they are appealing in text and can be put just about anywhere. Many people use these as their signatures on forums and blog posts to draw attention to their websites. They are very, very effective marketing tools and not difficult to create.

There are several tutorials online about how to create a widget or gadget. The first thing you need to understand is that this will connect to a website. Every time the website updates, the text that you use can update. A widget or gadget can be used in many different ways. For the most part, however, they should be used as a way to update information.

If, for example, you connect your widget to the weather channel, and you incorporate it into text into your website, your website will be updated every time the weather changes, which is often. This can continue to keep your website updated and at the top of RSS feeds.

If you change your website frequently, you will want to build a gadget or widget connecting it to your website. Again, with every change, the widget will automatically reflect that a change is being made. If you have subscribers to your website, even if it is a social page on MySpace, anywhere you post the widget online will continually update each time you change your MySpace page.

Think of what you use in your business that repeats often. Instead of constantly notifying people that you have a new shipment of a certain product, for example, you can incorporate a Google gadget into something like a subscriber link and have it automatically update each time you change your website. You can spread the links all over the internet, on bookmarking sites as well as social networking sites and the sky is the limit.

Building a Yahoo Widget, MySpace Widget or Google Gadget is simple and fun. There are fun tutorials that teach you how to complete this task. Just think about what you want to do with the gadget or widget and how you want to use it. Then log onto the Google, Yahoo or Myspace and follow the prompts. Then you can start building it.