Businesses run on four major parameters − Cash, Assets, Profit, and Growth. Let’s analyze each parameter one by one.
Many people tend to confuse cash with revenue, however nothing could be more different. A person operating his own bakery shop and selling a lot of cakes, pastries, and bagels by the end of the day might say that his revenue for the day is the cash that is deposited in his cash counter’s ledger desk.
However, if he supplies all the bakery products in a wedding and raises an invoice of $2000 to be paid the next month, his revenue could be $2000, but his cash is zero. It’s important to know the difference between these two terms because it’s cash, and not revenue, that drives the business.
There are certain terms that people need to be familiar with to understand the functioning of a business. They are −
● Cash position − amount of cash that is available at any given time.
● Liquidity − the immediacy of obtaining the cash available.
● Cash flow − cash invested vs. cash received.
Going by the previous example, if the expenses born by the baker to get things ready for the wedding amount to $400, then his cash flow is –$400.
Assets are things that are needed to establish and run a business. They include the office premises, the building in which the company has been set, the land on which the company has been built, and the supplies needed for the employees to complete daily tasks such as internet, telephone, computers, etc.
It also includes the investment and cash. The stronger the assets of a company, the more trustworthy it is perceived as. Companies with strong assets are often thought of as stable companies who can easily meet their financial obligations through their greater liquidity.
This is called the “asset strength” of a company. Asset utilization is the effectiveness with which the assets are being used in the company and how much efficiency it brings to the work process.
Profit is defined as the difference in the amount of cash spent in expenses and the revenue generated. For any company to survive, flourish and then sustain, it’s imperative that it generates real profits, unlike pseudo-profits where the margin of profit versus expenses could be eliminated through market-based fluctuations like production costs and inflation.
Growth is a key driver behind the success of any business. Start up companies tend to stick to what is working for them because their management thinks that they have hit the “magic formula” and any deviation will cause them to lose their new-found success.
Sticking to a magic formula might work for a start up company, as they need to consolidate their position in the market without trying too many things at the same time. However, the same strategy could spell disaster to an already-established companies.
You will always have start up companies who are hungry to succeed and take a share of the market pie. On the other hand, an established company might hit stagnation by catering to the same market over a long period of time.