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Value Creation Blog

What I’ve Learned About Profits First

Posted by Josh Patrick

profits_before_growthI’ve written a bunch of blog posts about why profits are more important than growth. It’s funny how the people who respond negatively to these posts are advisors or people who used to be in business. Business owners who have successful companies seem to get this principle.

If you own a business you’ve been down this road.

If you own a business you know that you need to put profits first. If you’ve been around for any period of time you’ve had lean times in your business. You might even have had times where you couldn’t afford to pay the bills and had to stop paying yourself.

Business owners who have been in this position never want to be there again. We are often paranoid about running out of cash. It’s one of the reasons that many business owners are so risk adverse. They just don’t want to take chances about whether they’re business will be around if the economy heads south.

Advisors think they know what it’s all about.

On the other hand, advisors many of whom have MBA degrees have been taught about the theory of growth versus profits. In many schools advisors have been taught that it’s all about growth and then profits will follow.

If you were around during the dot.com bust in the early part of the century you know how that worked out. Eye balls didn’t make any money and without a real model for producing positive cash flow there wasn’t going to be any way these businesses could sustain themselves.

There’s the myth of Amazon.

We’ve all read the interviews with Jeff Bezos where he talks about growth being the mantra and he’ll worry about profits later. What no one seems to ever ask him is what about cash flow. If they did Mr. Bezos would have to let the interviewer know that Amazon has amazing cash flow.

There’s a difference between generally accepted accounting principles and positive cash. They often are at odds with each other. No one, including Amazon, could exist for a long time if they ran out of cash. Generally profits go with cash. Without positive cash there is no business success!

I’m probably repeating myself.

I’ve written about this topic a lot. I would like to add one thing. It’s not just about having a little bit of extra cash, it’s about having enough to fund a retirement plan, a decent standard of living, and a fair return for your shareholders. If you’re the only shareholder, then it’s a fair return to you.

Too many private business owners don’t understand return on capital. You might be surprised what is required for a decent return on capital. It’s usually a pretty big number. Understand how return on capital works and how it affects your business.

Make your business sustainable.

Businesses that cover their cost of capital are sustainable. They’ll have enough cash that when the inevitable business downturn comes along and they’ll be able to survive the downturn. When times are good these owners will be able to put away money that will allow them the option of leaving their business at some point in the future.

Sustainable businesses are fun to run. They create happy customers who appreciate doing business with you. They create enough money to pay your employees fairly. They allow you to pay your bills on time. If you’ve ever had to delay paying bills, holding raises, or not be able to re-invest in your business you know what I’m talking about.

Be smart and create a sustainable business that focuses on cash. You’ll be glad you did.

We’ve put a special report together on the 3 Stages a business has. You’ll want to pay special attention to Stage 2. This where business gets fun. To get your case study on the 3 Stages click on the button below.

2 stages of business case study

Topics: profitability, for business owners

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