Have you heard this one? My friend works for so and so company (or owns it) and they are killing it. They have Y revenue per month and are going to be HUGE! If you live in Silicon Valley you have heard this probably every other day at a coffee shop. If not, you read about so and so company in the business press who has grown a million percent since yesterday or you know someone who is living it. Let me guess what you think after that conversation or article….Why isn’t my company like them? What the hell is wrong with me? (HINT: Nothing)
The thing about revenue is that it makes us feel so good. It’s a warm blanket that makes us feel like we are so successful.
The piece of information that is always missing is how much money the company is truly making. Not revenue, but the only thing that matters. PROFIT. You say that profit doesn’t matter for a growing company? Maybe if you are a VC funded startup you can get away with it for a while but at the end of the day, profit is the only thing that matters. Why? Profit = Freedom. It is true for all businesses. Being cash flow positive and profitable enables you to do things you couldn’t otherwise. There are exceptions but none of us are UBER or AirBnB.
- Need money from a bank? Banks are not going to lend to you if you are in the red (i.e. you are a bad bet).
- Selling your business? A buyer cares about multiples of cashflow. Your net profit margin is all they are about. No one buys a business on a multiple of revenue. OK, maybe some people do but don’t be that person.
- Are you a super sexy tech startup? Have great press and product market fit? Good for you! Guess what? Your VC is at a huge disadvantage if you don’t need his/ her capital in order to run your business. Sure you can use it for growth (which is the best reason to raise), but you don’t have to take it right now. You take the cash on your terms and shop around. You have leverage.
A personal story
A few years ago when I was in the restaurant business, I had the opportunity to discuss opening a location in a very well known high-end Las Vegas Casino. The kind of place where you can’t walk out without being quite a bit lighter (financially). We were meeting with the owner and his top guys and talking about the space we were about to take over. They start throwing out numbers that the current restaurant was doing and they were lower than I thought it would be but still solid. I sheepishly remarked that I thought the revenue numbers would be a bit higher given the location. To which the COO responded in his best “you are an idiot kid” voice. “This is the profit, we never talk about revenue. It doesn’t matter”.
Let me get this straight. The guys that live and breathe money every day do not focus on revenue? Wow. Besides being completely schooled in one sentence, I tried to digest what he was really saying.
- When talking about a business, net cash flow is what really matters. Yes it’s simply ROI in dollars but have you ever spoken about a business in purely profit terms? I never did. Think about it. Everyone talks about our businesses makes X revenue or this marketing campaign made us Z dollars. It could be tens of thousands, hundreds of thousands, or millions. Unfortunately, the truth is those numbers aren’t what’s important. At the end of the day, all that matters is whatever we take home in net cash flow.
- Investing a lot of money is fine if you are going to get the return you want. These casino guys don’t balk at investing millions to build out a space. They know that the profit that is going to flow and give them the returns they want. They keep their eye on the prize.
The really crazy thing was that these guys had huge books of spreadsheets (they were old school) that quantified the profit of everything in the casino and everyone who came through the door (who mattered). They could tell you how much so and so was worth to them to the cent. Amazing. I am reminded of what my grandfather always said to me. “They don’t build a billion dollar casino because you win”.
Before you get up in arms, obviously revenue is important and you can’t have profit without it. No one is saying that. What I am suggesting is that we as businesspeople start changing the way we think. Let’s talk about the net cash flow that is generated by programs or products (at least internally). When looking at a program, figure out the net profitability, not the ROI which is typically in stated revenue. Use the net profitability number when evaluating things, especially digital marketing programs.
Revenue * Margin – cost of program = Profitability of program
If you never looked at your programs this way, try it. I guarantee it will be an eye opener for many of you. Many programs will look a heck of a lot riskier, less profitable than you thought, or maybe even unprofitable.
Perform the exercise and let me know what you discover.