Wikipedia defines ‘gross margins’ as the difference between revenue and the costs of goods sold, divided by revenue and expressed as a percentage. An example of gross margin occurs when Store A buys 100 widgets for ten dollars and sells them for $15. Subtracting the initial $1,000 investment from the $1,500 earned from sales results in a gross margin of $500.
Diluting the gross margin, however, are Store A’s operating costs, such as rent, salaries and other expenses of doing business. Subtracting those operating costs from gross margin results in what every store, not just Store A, hopes to see at the end of the day: net, also known as net profit.
But, according to Cincinnati attorney David Myers, who is also president of SpliceNet, a computer support and IT consultancy, businesses face a more pressing concern than profit: cash flow.
“While we care about running profitable businesses, SMB owners won’t stay in business long without cash flow,” said Myers. He explained that proper management of cash flow includes “making sure you collect on your accounts receivable. If you don’t, you will end up with an insolvent business in short order.” While Myers oversees two successful business endeavors and is on the verge of jumpstarting two more, he remains extremely cognizant of not growing his entities too quickly.
That’s because he’s concerned about the phenomenon called ‘Growing to Death.’ That occurs when a company grows incredibly fast, exemplified by many orders or a lot of work while lacking the requisite cash flow to pay the bills. The doors will close soon if that’s the way a business is run, he said.
“Profit is awesome but cash flow is king,” said Myers.
Tami Kamin Meyer is an Ohio attorney and writer who tweets as @girlwithapen.