A great comment by the legendary Jack Welch. I think few business owners would disagree with the measures of customer and employee satisfaction, but many might question seeing cash flow, as opposed to profit, as the third measure.
But a profitable company can still be brought down if it doesn’t control its cash flow. Smaller companies, in particular, often suffer this when they land a ‘dream contract’ only to find the new customer is a very slow payer and their own suppliers demand payment well before the money comes in from the big deal.
As marketing guru, Peter Drucker, said, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”
Traditionally, of course, companies looked at revenue (sales) and profit to determine success, and it was only in the late 1980s that it became mandatory for companies to file a cash flow statement along with the more traditional income statement and balance sheet. This was because the latter both looked at revenue / assets not yet received and payments / liabilities not yet paid, whereas the cash flow statement shows the money actually flowing through the business.
This is also why, when directors consider whether the business is a ‘Going Concern’ – as they should do regularly, and at least at every board meeting – they are required to look at not just the solvency (assets exceeding liabilities) aspect of the company, but its liquidity position, too (essentially, whether the business can be expected to meet its payments on time over the next 12-18 months). Should they not do so, they risk being held liable for any debts, losses and other costs incurred in connection with the business.
So, when looking at a company – perhaps as a long-term supplier, a partner, a customer, or for potential acquisition – look carefully at its cash flow. Poor cash flow is a strong indicator of problems to come and you don’t want your business to be put at risk by the failure of another. And strong cash flow is certainly a competitive advantage, too.
As the old adage goes, “Revenue is vanity, profit is sanity, but cash is king.”
I work with successful owner-led businesses to enhance their growth, profitability, cash flow and business value.
If you’d like to have a conversation about your business and how to improve cash flow, book a free 30-minute call with me here. I’d be delighted to talk with you.
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