I recently came across this old saying, “The top line is vanity; the bottom line is sanity; but cash flow is reality,” and thought – wow – what wise words for entrepreneurs to live by.
Entrepreneurs are too often caught up by the vanity of the top line (revenue) – after all – it is what most people from the outside looking in judge you by. It is also easy to understand (and the first line on your profit and loss statement) – your revenue is what others have paid (or promised to pay) you for all the goods and services that you’ve provided. Bottom line (profit) on the other hand is typically much more important than your revenue.
I’ve seen my share of 1 million dollar businesses with a net loss of $250,000. Not something to be proud of – but something that is a little less obvious and easier to hide from the judgmental eye of the public. By understanding the different shapes and sizes a profit can assume (gross, net, by department, by project, by region, by service line, etc.) an entrepreneur can identify the culprit of a less-than-desired profit and perhaps do something about it.
Cash flow is what most entrepreneurs (and, embarrassingly, many accountants) have a shaky understanding of. In fact, I’d argue that too many people are afraid of it and thus choose to look the other way. Bad idea. If your accountant tells you that you don’t need to understand your cash flow (or does a wishy washy lousy job at explaining it.) Fire them now. Focus constantly on your cash flow. If you keep your cash flow healthy then you have a great chance at success.
Next time, we’ll talk about how not to confuse profitability (bottom line) issues with cash flow problems and how to address each.