When we talk about business management we tend to think in terms of margins, ROI, various ratios and other metrics.
The thing to remember in running a long term sustainable business is that in many ways, the old “cigar box management theory” still applies.
There was a time when a small business would be paid in cash and would put the money into an old cigar box for “safe keeping”. When the business needed to buy something, they would remove the money needed from the cigar box and make the purchase. As long as the cigar box had money in it, the business was fine. If the business didn’t have enough money in the cigar box to make the purchase they would either not make the purchase or figure out what else they could sell first to get the money.
Nowadays, if we don’t have enough money to buy something, it’s not a problem, we either borrow the money OR expect someone else to pay for it for us.
What if more people and businesses went back to cigar box money management? What if we only bought what we could afford and had to make a choice of either finding a way to bring in more money or figuring out what is not as important to buy?
If you are a salesperson and realized you didn’t have enough money for what you need to buy, might you be willing to work a little harder or to lower your prices a bit so that you might make less profit but had the money to survive?
As a business owner, might you be a bit more diligent in your management if you looked at things more from a cash flow basis instead of some other metrics?
There are some risks in using pure cash flow in all of your decisions. In order to earn enough money short term you might start selling things for below cost and if you do that enough times, you will be out of business long term. On the other hand, if you aren’t willing to make some sacrifices on occasion, you might not have to worry about the long term since you will be out of business short term. Another risk is that some very expensive research and development would never happen if we only used cash flow because the development of new medicines, new technologies, new energy sources are extremely expensive and it would make it very difficult to finance just through cash flow. Without some of these projects, this world might not be as advanced as it is
I’m not suggesting that all businesses should go back to cigar box management but I do believe that if more people thought about real cash flow as a viable business management and personal management application, we, as a society, might be better off
Just something to think about.
Have a great day!