Revenue Is Not Cash

Here are two businesses. The first turns over one hundred thousand pounds in a year. The owner says this number often, because it is a good number and it took work to get there. Most of it is reinvested, which means it goes on advertising, on contractors, on software, on the things that buy more revenue next year. At the end of the twelve months the business is at break-even, or a little worse, and the owner has been paid irregularly from whatever was left over after everyone else.

The second business produces three thousand pounds a month of positive cash flow after every cost has been paid, including the owner's salary. It does this every month. It may turn over far less than the first business. Nobody at a dinner party would be impressed by its revenue figure, and the owner does not mention it. But at the end of the year there is thirty-six thousand pounds in the account that was not there at the start, and the owner has been paid on the same day every month like everyone else who works there.

Which of these is the better business? Almost everyone, when asked, says the second. Almost everyone, when they describe their own business, uses the first number. Revenue is what gets said out loud. Cash is what actually pays you. The gap between them is where most of the trouble in an owner-led business lives, and it is a gap nobody can see from the roof.

I learnt this the hard way, not in my own business but in other people's. For the better part of two decades my job was to look at companies and work out whether they were worth what people were paying for them. Revenue growth was the headline, every time. Cash was the footnote, and the footnote was where the truth was. I watched companies with magnificent top lines run out of money, and I watched quiet companies with unremarkable revenue build fortunes, because one of them was measured to cash and the other was measured to applause.

The response is to decide, today, which of the two numbers your business is measured to. It sounds like a small decision. It changes everything that follows.

If you measure to revenue, you will do the things that increase revenue. You will take on the large client with the thin margin. You will spend on advertising because it brings in sales, without asking what each sale leaves behind once the advertising has been paid for. You will hire ahead of the work because growth needs people. Every one of these is defensible. Together they build a business that is bigger every year and no better off, and an owner who is more tired every year and no better paid.

If you measure to cash, the same decisions come out differently. The large client is priced to leave something behind or declined. The advertising is held to what it returns in cash within a stated number of months. The hire waits until the model shows the month in which it pays for itself. The business may grow more slowly for a year. It will also still be there, and paying its owner, in five.

The number the floor is built to is the second one. Three thousand pounds a month after all costs is the figure I used above and it is a modest one, chosen to make the point rather than to set a target. Your figure will be different. What matters is that it exists, that it is cash and not revenue, and that it includes your own pay as a cost of the business rather than as a reward for being the last one standing at the end of the month.

Tomorrow I want to tell you what happens when you ask a hundred business owners whether they have a model at all, and why the answer is not the one you would expect from people this capable.

Continue reading: Ask a Hundred Business Owners →

The session: The Nine Fears, and the floor underneath your business. Wednesday 2 December, 5pm UK, free →

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The book: The Science of Getting Rich and How to Apply It →