A sale is not money in the bank

Is your business winning work and sending invoices, yet somehow there is never enough in the account at the end of the month?

It is tempting to blame a slow month or one late payer. Usually it is neither. The work is real and the invoices are real. The money simply hasn't arrived yet — and some of what has arrived was never yours to spend.

Most first-year owners track one number: sales. But a sale, a profit and cash in the bank are three different things. Treat them as one and you can be busy, profitable on paper and still unable to pay a supplier on Thursday.

This is the most common way a sound first-year business gets into trouble, and it rarely looks like trouble until the week it does.

Know your three numbers, and price from the bottom up

Revenue is what you have invoiced. Profit is what is left after the costs of doing the work. Cash is what is actually sitting in your account today. Only the last one pays wages, rent and the tax office.

Here is how far apart they can sit. The numbers are round and purely illustrative.

You win a job worth $10,000, plus $1,000 GST, so you invoice $11,000 on thirty-day terms. The materials and labour cost you $7,000, and you pay those this week. On paper you have $10,000 of revenue and $3,000 of profit. In the bank you are $7,000 down.

A month later the client pays $11,000. It feels like $11,000. It isn't. $1,000 of it is GST you collected for the government, and it goes back out with your next activity statement. You have made $3,000, and you waited a month to see it.

Now picture three of those jobs landing in the same month. The profit triples. So does the hole you have to fund while you wait.

Three habits keep these numbers honest:

• Open a separate business account on day one. When personal and business money share an account, you cannot see your cash position, and neither can your accountant.
• Put GST aside the day it lands. Once your GST turnover reaches $75,000 — or you expect it to in your first year — the ATO requires you to register. From then on, move the GST portion of every payment into a holding account. It was never income.
• Price from cost plus margin. Add up what the work actually costs you, including your own time, then add the margin the business needs to survive. Your competitor's cheapest price tells you nothing about their costs, their debt or how long they will last.

The honest objection is that sometimes you need to discount to win your first client. That can be the right call. A reference customer is worth something, and a lower price is often the cheapest way to get one.

Just call it what it is. That discount is a marketing cost, not a price. Write down the amount, and put an end date on it before you agree to it. Discounts with an end date are an investment. Discounts without one become your price.

MoviePass grew itself into the ground

In August 2017, the American subscription service MoviePass cut its price to $9.95 a month, for one cinema ticket a day. Its new majority owner, the data company Helios and Matheson, bet that volume would build something valuable.

The customer loved it, and the mechanism was simple. A subscriber checked in at the cinema through the app, and MoviePass loaded a payment card with the price of the ticket. The cinema was paid the full ticket price. The subscriber paid less than a single ticket costs in most markets for the whole month.

Subscribers poured in. By its own figures, MoviePass had around one million by December 2017 and more than three million by mid-2018. By May 2018, its cash expenses were running roughly $40 million a month ahead of its revenue, according to company disclosures reported at the time.

The service cut benefits, capped viewings and shut down in September 2019. Helios and Matheson filed for Chapter 7 liquidation in January 2020.

Most people remember MoviePass as a deal that was too good to last. The sharper lesson is that its growth was the problem. Every new customer who used the product made the hole deeper. More sales did not rescue a price set below cost. They sped up the collapse.

Why I do it this way

I have run my businesses on these three numbers for years.

I bought my first hotel business at twenty-eight with money borrowed from family and friends, and I repaid it within twelve months. That only works if you know the difference between revenue and cash.

Revenue told me the business was performing. Cash told me what I could actually send back each month without leaving the business short. They were never the same figure, and the gap between them was where the discipline lived.

Borrowed money from people you love sharpens the mind. You stop admiring the sales line and start watching when the money actually lands, what is owed out of it, and what is genuinely left.

Do this before Friday

Open your bank account and write down three figures: what you invoiced last month, what it cost you to deliver, and how much cash actually arrived.

If you are registered for GST, take the GST out of that last figure. Then look at the gap between the first and the third. By Friday, you will know whether your business has a sales problem or a cash problem — and they need very different fixes.