Have you heard the saying, “Revenue is vanity, profit is sanity, cash is reality”? Nearly all business owners have, but most aren’t entirely sure what it means, and that’s okay. Self Storage business owners need to understand the difference to make sure their facility is making money. Let’s break this down right now, and you’ll be wiser than most of your competition.
Revenue is Vanity: Revenue is the top line on your income statement. For a storage business, it is normally the cumulative amount of rent, inventory sales, and truck rentals. Rental income is usually the largest number in the revenue section, since that is your main business. Seeing a large monthly rental income number and a high occupancy rate can make you feel like your storage business is a success, since you are mostly full and the hard work of marketing and breaking even is over, but don’t let vanity block your view. Here are some factors to consider:
- Are you charging enough for your units?
- Are you actually collecting that revenue or is it all in accounts receivables?
- Are you selling inventory at enough of a profit?
Without an understanding of Profit and Cash, you can’t answer those questions.
Profit is Sanity: Profit is what is left after you paid all of your expenses, otherwise known as “net income.” You need a positive profit number to stay sane…and to stay in business, but profit can be deceiving. Some business owners assume that all net profit will translate into cash in the bank, but that is rarely the case. The BIG four factors that will affect your profit and cash differently are: depreciation, income stuck in accounts receivable, bill payments stuck in accounts payable, and principal loan payments.
- Depreciation: When you build a new facility or buy an existing one, part of the cost is paid in cash, and the other part is financed. Each month, net income is reduced for depreciation expense on the total cost of the building. This expense reduces your profit but has nothing to do with cash.
- Principal loan payments: When you pay your monthly loans, the interest portion reduces net income but the principal portion reduces the balance of the loan on the balance sheet. You paid cash for the whole loan, but only one part reduced your net income.
- Accounts Receivable/Accounts Payable: If your books are on the accrual basis, you book the receivables and payables before money moves. That means that you can have income or expenses on the income statement, but cash hasn’t moved yet.
Cash is King: If you can’t pay your loans or payroll next month, do you care how much revenue is on your balance sheet? Probably not. Cash is king because cash moves your business forward. To properly run your business and achieve your goals, you have to be able to predict where cash will be next week, next month, and next year.
As a CPA, I can help you understand your cash by reviewing the cash flow reconciliation report so that you understand how your business turns net income into cash, and more importantly, how much of net income becomes cash. Once you have a handle on how the cash flows through your business, we can make budgets and forecasts to help set your managers’ goals.
Do you need to increase inventory sales or is renting units more profitable?
Want to develop a rock solid revenue management program that you can feel confident about? Check out my course “Price With Confidence: Self Storage Revenue Management”
Is having everyone on credit card billing a lucrative business strategy since they will tend to stay longer?
You can’t answer any of these questions until you understand your financial statements and the impact that your decisions have on your cash.
Revenue will boost your ego, and profits indicate your business is growing, but only cash will pay the reality of next month’s bills.