Monday, October 26, 2015

Sales and money inflow

Sales and money inflow.

I have explained on scores of occasions to my staff and at times even to some owners of businesses (not that they don't know)
that when I sell an air-conditioner for say Rs.30,000 and get the money.....  only about Rs.1,000 or so out of that can really be considered as MY money ( that is to say the company or firm's money). The balance of Rs.29,000 or so is to be used to buy another air-conditioner to be subsequently sold.

Many people don't understand or don't want to understand this simple logic. They think that they have "made" Rs.30,000 and spend it off.

Well, one can do that. But that Rs.29,000 has to be recouped by some revenue stream - by sales or service revenue. Very soon.

If one does not do this exercise then what happens? (a) The working capital will get eroded. (b) The money owed to suppliers will shoot up. What could happen "one fine morning" anyone can imagine. Let us not go into the details.

Some of the new-age dealers are very smart (like the on-line shops). They try to sell more and more of units at very  low margins or sometimes even with negative margin (to keep the revenue stream (so called!) flowing. Many are in deep waters for this very reason.

All of the business' fixed and variable overheads has to be met with the "margin" generated by sales and service and after that some thing more should remain as reserve/surplus.

Then and only then can the business thrive!

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