Many entrepreneurs that believe that first you fight for expanded sales, building revenues, cash flow, (profit be damned,) and then fine tune for profitability once you achieve the level of revenue you were looking for.

I have seen this theory practiced in many failing enterprises, as the business owner tries to build the customer base first and, if he manages to remain in business long enough, he begins to raise prices, charge for shipping, trim internal overhead, adjust payroll, advertise less, and build in profitability.  He usually fails to accomplish his goals as he chokes to death from lack of capital, while trying to live and grow off of cash flow.

Some say he grew too fast and went out of business because of too rapid a growth curve.  This frequently occurs, but the real reason is not just rapid growth but rapid unprofitable growth. He went out of business because he had no profit to carry him. One cannot grow on cash flow alone, especially unprofitable cash flow.

Building revenue and then fine tuning for profitability sounds like a reasonable approach, but upon closer inspection it is fraught with inconsistencies and contradictions. It will result in cash starvation forcing an implosion.  Especially in a rapid growth curve, the cash flow will not save the day.

First of all, since we are always chasing our dollars, between inventory, work in process, raw materials, daily and weekly overhead and accounts receivables, if we do not make a reasonable profit we will not have enough working capital and will crash and burn. There will be inadequate funds to run the business.

Assuming you have not started with an enormous bucket of cash, the only way to finance growth and development is with profit from each sale. It is a huge challenge even then as accounts receivable are always representing a large amount of unavailable cash flow especially in a growth curve. Thus profitability is even more crucial to basic survival, let alone growth.

Why not start with profitable sales from the very beginning, and become more profitable every day, re-investing the profit to fuel and support growth and development? Can there be any other way to succeed?

Further, what is the real value of creating a customer base that is only willing to pay a below market price? Is this a real sustainable client base, a foundation? So I ask the rhetorical question, what possible reason would we have to sell anything at below an acceptable level of profit? I can see no reason although I see it happen all the time.

Recently I watched a client lower the price for an installation of flooring, to match a competitor, to meet a customer’s budget requirements and to grab the sale that minute. The price was so low it was very questionable whether even a very narrow gross profit would be earned and if overhead were figured, it clearly would not be profitable at all. Contribution, he said, keeps the men busy, its an in and out, a quick turn round, so why lose the business?

This is a very good question, and still gets the same answer, there is no reason to work non- profitably. Either charge a reasonable profit or do not do the business. If its all about contribution to reduce the overhead burden, then change the overhead to accommodate less burden, but the only thing that reduces the overhead burden is profit, not cash flow.

Every dollar that is used that is not profit is a dollar that belongs to vendors, overhead providers and payroll, you’re just borrowing them today because of the timing of the flow, replacing the current dollar designed to cover overhead with future dollars as they arrive tomorrow.

This may work for a short while, but eventually when the market declines, a receivable grows old, a hiccup in the program from whatever source occurs, or growth which demands investment requires more and more cash, you’re not getting new dollars to replace the ones you used, and can’t buy inventory or pay bills or payroll, despite growth in revenues, or at least sales, you will then understand the reason to work profitably and grow out of margin.

Think about it, there are three challenges confronting your cash flow.

1. money to cover old unpaid payables that tend to build up when operating unprofitably

2. money to cover current operations, overhead, payroll etc.

3. money to invest in growth and development, additional product or manpower etc.

Don’t forget a large percentage of your usable cash is trapped in receivables thirty days or more away. So how does one grow when you have to cover the old, cover today and build for the future while waiting for your cash to arrive in thirty days…impossible in a word.

Thus, the only possible answer is to grow out of profits (or new cash investment). Thus the concept of grow first, profits second is pure folly.

Every job, every day, every week must be run profitably regardless of gross revenue.  Growth comes from investing new capital either from sales or investment but not from cash flow.

Resist this old unsupportable tale of revenue first, profit second, it will be written on your businesses tombstone if you fail to remember this.

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