“Cash is King” Doesn’t Tell the Whole Story
Revenue is vanity.
Profit is sanity.
Cash is king.
Best I can tell, this quote comes from Alan Miltz, who co-wrote Scaling Up with the great Verne Harnish.
And the sentiment is accurate. I know it. You know it. We all know it.
If you run out of cash, you’re screwed.
For young entrepreneurs in particular, it’s a valuable lesson. It’s easy to be misled by skyrocketing revenues that aren’t particularly profitable. Even profit won’t help you if it only lives on the P&L. You need enough cash in your bank account to cover payroll, or you’re sunk.
The Limitations of Focusing on Cash
However, this statement has its limits. It essentially stems from a fear-based way of looking at a business.
Yes, you need a cash flow statement and projections (for the next 3 years at least) to ensure you won’t go broke on the way to hitting your growth goals.
And yes, you should ideally have 3-6 months of operating expenses banked for a rainy day.
But assuming you have those things in place (and if you don’t, please reach out to see how we can help you), you must, must, MUST focus on profitability.
Cash Flow is Table Stakes
Healthy cash flow, to a mature business, simply becomes table stakes.'
Cash can be deceptive. You may have a ton of cash in the bank, but very little of it is yours to keep. Consider companies that get paid up front for large projects, for example, or companies that hire and manage a significant number of subcontractors or purchase large amounts of materials. There’s a great deal that depends on your business model and AP/AR systems.
And as counterintuitive as it sounds, catching up with cash could indicate a slowdown in growth. Companies that are scaling tend to grow faster in selling business than they can collect. If collections start to catch up, growth is probably declining.
Consider this, too: Companies don’t sell based on the cash they have in the bank.
Most valuations are still based on a company’s EBITDA. It’s increasingly common for valuations to be based on a multiple of revenue.
But nowhere is a business valued based on its cash.
Profit Wins the Day
What’s the bottom line here?
Focus on profitability. It will never lead you astray.
If you have a profitable business model, then revenue becomes a more important indicator of growth.
And provided you have the basics in place, cash flow will fall into place.
So maybe cash is king, in that symbolic-monarchy-without-real-power kind of way.
But profitability is really in charge.
P.S. If you have questions about the profitability of your business model, cash flow management, or valuation, set up a free consultation with our Finance Services team.
