One of my favorite questions to ask a business owner or leader is “How do you make money?”

I ask this question for two reasons: it is great to learn how other organizations make money and it is surprising how difficult it is for many people to answer this simple question.

The reality is that almost all organizations make money the same way, selling their goods and services for more than it costs to produce them…the challenge seems to be really understanding those true costs or margins.

What are the costs of goods sold?

What are the direct labor costs?

What is the cost of overhead?

For that matter, what is a fair profit margin?

Generally speaking these are facts or at least should be.  Who has ownership or accountability for the accuracy of these facts in your organization?

The sooner an owner of these costs is assigned, the sooner the true costs will become clear.

So once we know how we make money which of the following is the most critical number to an organization?

Revenue

Net Profit

Cash Flow

The following saying will provide perspective ”Revenue is vanity, profit is sanity but cash is king”.

The revenue number on a P&L is an opinion!  You can delay a sale; choose to book it in a variety of ways over time, etc.  In other words the revenue line can be manipulated…so it is an opinion not necessarily a fact.

The net profit on a P&L is an opinion as well!  You can choose to invest some of your profit in new equipment or facilities that you may not even need right now.  You can accelerate certain types of payments to vendors.  So profit is also an opinion, not a fact.

The cash that you have in the bank though is a fact.  Your net cash flow from operations is a fact.  You can physically count the money.

We all look at our revenue and profit lines with some degree of regularity.  We should be looking at our cash balance daily!  By checking the cash balance daily we will always know where we stand with our cash and begin to ask ourselves about the revenue and profit growth and their relationship to cash flow.

Make sure that the way you make money turns into cash.

 

Dave Baney is the founder and CEO of 55 Questions, LLC. We work with successful top executives with a driving ambition to crush their competition. We help CEOs and Entrepreneurs improve alignment, communication and accountability throughout their organization. 55Questions.com

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