The most important requirement for a start up is not just PROFITABILITY, but also the availability of CASH. Cash flow is not the same as profitability – and many businessmen do not realize this. If you are a supplier of material which is not critical for a business, chances are your payment will be delayed. It hardly matters whether your customers are Tata Motors, Reliance, Hindalco….or PSU organisations like HPCL, BPCL or IoC.
Most of the big organisations specialize in delaying payments of not very significant vendors. The excuses that they find for doing this could be genuine or fake. As a small vendor you can only grin and bear it.
Sadly many small businesses do not understand the following concepts:
Sunk Cost vs Fixed Costs vs Period or Time Costs
How Fixed costs vary
Variable costs, Marginal costs, and Contribution.
Many of them do not understand the difference between cash flow and profitability. Very few of them can take decisions based on inventory stockpiling – and stock reduction.
A few days back I had done a post saying all businesses are not necessarily profitable. One of the comments there was how a person invested Rs. 60L for a petrol pump business and was earning Rs. 1.25L pm. The next person commented that it was a 25% return on investment.
Now the questions to ask were the following:
Rs. 60 L + existing land or just Rs. 60L. I am sure that Rs. 60L is the equipment, furnishing and inventory costs.
Rs. 1.25L pm is gross profit – and if you reduce the salaries, rent, etc. it has to be much lower. You need to look at the profits afte all these expenses.
If the person working there has a potential of earning say Rs. 50,ooo p.m. – another Rs. 50k has to be reduced from this figure!
So before we jump to conclusions, we need to make sure that we calculate the real correct returns…and then comment!
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