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.

Why Widgets Are So Successful in SEO

The future of SEO just might be widgets. This is because widgets are tools of high engagement on the social media systems. This means that widgets just might give a business an unfair advantage when it comes to SEO. This is because most companies do not know how to create or use a widget effectively.

So what is a widget exactly? A widget is a consumer engagement tool that a consumer takes from a website and puts on their website. This usually includes a link back to the website that created the widget. Widgets are very effective at getting links because they provide real value to the internet besides being very entertaining at times.

The classic example of a widget is a quiz. A quiz has a very high engagement rate and people have a hard time not taking a quiz. This means that a person loves to take the quiz. In most cases, the people taking the quiz would not only link to the quiz (so that their friends could take the quiz) they would also receive a “badge” that would display their results. This is what was usually displayed on a website and what contained the link back to the creator’s website. This is a highly effective way of generating links.

A widget can also be an info graphic. An info graphic is a graphic that is usually funny in nature; people find these graphics on sharing sites and load them into their own personal sites. This graphic contains a link back to the creator’s site. Therefore, they gain back links from the use of the info graphic. This method has gained a lot of popularity in recent times. Therefore, a person can reasonably expect to see more of this back link generation to occur in the future.

Finally, a person may generate a user specific (or niche specific) widget. The classic example of this is the mortgage calculators. These calculators are everywhere on the internet, but someone had to generate the code to make them. Therefore, someone generated the code and inserted a back link into the code to get their sites ranked higher on the search engines. This method works well for industry specific sites where the use of humor does not make sense for the business. This is because the business needs to have a more professional tone and having a funny widget would hurt the business.

In conclusion, a business that is serious about SEO has to consider making a widget for linking purposes. There are many types of widgets that a business can use. Therefore, a business should consider all the widgets available, and then begin making their own as soon as possible.

Benefits of Blogs For Business Marketing

After the advent of the World Wide Web the next big fad was blogging. Suddenly everybody from home-makers, young mothers, businessmen, and grandparents were blogging. Personal blogs sprung up dime a dozen all over the internet, leading to a blogging network of similar blogs and bloggers. The word ‘blog’ sprung from the term ‘web log’ coined by Jorn Barger in 1997. The blogging boom began with the appearance of easy-to-use blogging software developed in 1999.

What exactly is a blog?

A blog is an online journal that can be updated at your convenience. You can have a personal blog, like keeping a diary open for public viewing or a business blog maintained in order to have a platform to discuss business-related topics and share your expertise online with potential customers, interested clients, or your employees.

7 Marketing benefits of having a business blog

Having a business blog can have several advantages for a small business on a tight marketing budget. If you do not have web designing know-how, a blog is a great alternative that offers free setup and easy maintenance.

You can offer helpful hints and promote your own products, upload instructional or demonstrational videos on to your blog. You can build a subscriber base using your blog, and generate leads by notifying your followers when you have new content up. Google’s Blogger allows for Google AdWords to post ads on related products or services in your blogging space, giving you the option of passive earnings through affiliate marketing. Listed here are 7 important benefits blogging offers to business marketing:

1. Low-cost internet marketing tool: Opening a blogging account on Blogger or WordPress is free and you have the required software to be all set in a few hours. However, it is important to host your own blog even if you use free blogging software. Registering your own domain name and having your blog on your own server space gives you better visibility in search engine rankings.

2. Drive web traffic to your business website: When you have a blog and a regular following it is like having another website, but with reduced functionality. Your blog will rely on SEO articles, images, or videos. Your followers can be redirected to your business website if you have one, with the goal of converting interest or leads into sales.

Make an SEO keyword list for your niche market and base your articles and videos on these keywords. This will drive both natural and paid search to your blog. Include your blog URL in your social networking site profiles encouraging friends or fans to follow your business blog. This will drive traffic if you have a reputation for great information or expertise in chosen your niche.

3. Build your product or brand image: You can build your brand imageusing your blog. People reading your blog maybe interested to know what you do – add your business widget or button to your blog. Write a product description or post an infomercial.

4. Maintain a customer dialog: Blogs are interactive, which means that your readers can interact with you through posted comments and questions on the blog (which can be moderated). This is your chance to weigh customer opinion, suggestions, and comments.

5. Gain new customers: Some followers may recommend your blog to others bringing you new business prospects.

6. Network with other similar businesses: All businesses run on internal and external networks. Keeping up with similar blogs and their articles can give you an opportunity to comment on their articles while adding value to them presenting your knowledge on the subject. A reader interested in their blog may click-through to yours to read more! These kinds of click-throughs are free and generate more traffic to your blog.

7. Great public relations outlet: In case, your business runs into some bad press your blog can be your chance to demonstrate a clean slate. You can make your stand clear or challenge a public opinion. As regular readers are aware of who you are and know you from regular online interaction, you have a better chance to garner support through viral means.

Blogs are great additions to your Social media marketing (SMM) strategy. For those who do not have the money to pay for website design and site building, blogs double up as a website cum interactive online tool. The only downside is that they do not provide the functionality of web pages, have limits for e-commerce solutions, and can be time-consuming with regular posts; but blogs rank high as a low-cost marketing option.