By Magen Smith
Have you heard the saying, “Revenue is vanity, profit is sanity, cash is reality”? Nearly all self-storage business owners have, but most aren’t entirely sure what it means, and that’s OK. Let’s break this down 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’s normally the cumulative amount of rent, inventory sales and truck rentals. Rental income is usually the largest number in the revenue section, since that’s 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’re 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 rent for your units?
- Are you actually collecting that revenue or is it all in accounts receivables?
- Are you selling inventory at a price high enough to turn a profit?
Without an understanding of profit and cash, you can’t answer those questions.
Profit Is Sanity
Profit is what’s left after you’ve paid all your expenses, otherwise known as “net income.” You need a positive profit number to stay sane—and in business—but profit can be deceiving. Some storage owners assume all net profit will translate into cash in their bank account, but that’s rarely the case. The big four factors that will affect your profit and cash differently are depreciation, principal loan payments, income stuck in accounts receivable, and bill payments stuck in accounts payable. Let’s look at each.
- Depreciation: When you build a new facility or buy an existing one, part of the cost is paid in cash, and the other 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 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 you can have income or expenses on the income statement, but cash hasn’t moved yet.
Cash Is Reality
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 it moves your business forward. To properly run your facility and achieve your goals, you have to be able to predict where cash will be next week, month and year.
It’s important to understand your cash by reviewing the cash-flow reconciliation report. You need to know how your business turns net income into cash and, more important, how much of it becomes cash. Once you have a handle on how cash flows through your business, you can make budgets and forecasts to help set your managers’ goals. Here are some things to consider:
- Do you need to increase inventory sales or is renting units more profitable?
- Do you need to raise your rental rates?
- Is having your tenants on credit-card billing a lucrative business strategy since they’ll tend to stay longer?
You can’t answer any of these questions until you understand your financial statements and the impact your decisions have on your cash. Revenue will boost your ego, and profit indicates your business is growing, but only cash will pay the reality of next month’s bills.
Magen Smith is a former self-storage manager turned CPA who started her firm to help customers understand the financial side of their business and empower them to make smart decisions. Through SelfStorageCPA.com, she focuses her energy on the day-to-day accounting of self-storage businesses to give owners peace of mind. Services include monthly management-use-only financials, simplifying the bill-paying function, revenue management and strategy. For more information, e-mail [email protected].
