Often an entrepreneur is worried about when his or her venture will become profitable. Profit is what a person /firm receives when all the expenses related to procurement of goods , admin expenses and taxes have been added and then deducted from the amount that has been accumulated by selling manufactured goods at a certain price.
Profit = Sales –( All expenses including administration, procurement and taxes).
Though it is desirable to become profitable that is positive result on the left hand side of above equation, it is often very difficult for an entrepreneur to achieve that.
An entrepreneurial venture is very small so as to generate high levels of sales. The expenses most of the time though are huge and tend to drag the profits down for years. Thus for a few years sales are almost negligible while expenses tend to rise with time. It will be a few years before sales will actually start catching up the expenses.
Does this mean entrepreneur should not worry about getting profitable soon? No but the focus should be more on keeping the venture alive and using the cash flow to generate more assets and funds for future expansion.
As much as we like to see some profits generated by our venture, it is a good idea to keep them on the back-burner. A start-up like any other investment avenue ( such as Fixed Deposits or stock market ) is a long term investment. It is not just possible to someone to say invest a million dollar today in stock market and reap ten millions dollars the next day. If someone does , it may be an anomaly and not the thing that can be repeated as a process.
A business like stock market will require heavy investment in its early days without regards to how much profit it is generating.
Instead the entrepreneur needs to focus on being cash flow positive. His or her venture is like an athlete running very fast to compete and this needs a lot of glucose to sustain. Cash flow means the difference between money that you are making / have / likely to gain and money that you are expending/going out as interest .
Thus you achieve positive cash flow when you know that you have enough cash to survive for example in the next month or for the next year. The moment you run out of cash your venture is in trouble. Now you may take sufficient loans/credits to cover cash problem but that is not a permanent solution.
Cash flow = Money that flows in ( from your own fund, earnings, investment) – Money that goes out ( because of expenses, taxes, liabilities , interests etc.)
The remarkable thing is that even though you are profitable , your venture may collapse because it did not do well to manage the cash flow and remain positive on that.
A small business or an entrepreneur must be more conscious and worried about the cash that it is going to need to run its business.
Now with this knowledge, we can easily determine the ways in which we can remain cash positive. We can either increase our earnings, get credit , add more from savings or reduce expenses by for example moving to a less costlier location.
Thus an entrepreneur needs to concentrate more on cash flow that becoming profitable for a long period of time. Even if the venture becomes profitable even then it should be reinvested to expand operations,to reduce interest outgo, create new products.
Now its your turn :Even though you are running a micro business/blog/ecommerce site, are you more concerned about profit or being cash flow positive?