By Tim Berry
I want to put some music into your head. Depending on your age, it’s either “Strength, Courage, and Wisdom” by India Arie, or “Lions, Tigers, and Bears,” from the Wizard of Oz. Your lyric for this one, however, and regardless of which one of those you choose, is “cash, growth, and profits.”
What that would-be musical phrase is about is priorities in a growing business. It came upon me 15 years ago when I was dealing with somebody I didn’t know well who was offering to become a partner in my fledgling businesses. I was stuck at the time, supporting my software products with my consulting.
So without knowing each other well, trying to establish common ground about a very uncertain future, I came up with “Cash, growth, and profits” as a way to set priorities hard and fast, as foundations for doing business, and working together, into the future.
His first reaction was puzzlement. “What?” he said, as if to say, really, so what? “Doesn’t everybody want that? What’s to deal with? How does that help us.”
Hold on there. These three seemingly obvious concepts seem mutually compatible, but actually that happy family appearance is a facade, as different from business reality as a television family from a real family. Like a real family, they smile for the picture, but they fight all the time.
“Cash flow is our first priority,” I told him (paraphrasing, obviously), “because we don’t have outside investment to support us. Simply put, we can’t spend money we don’t have. Not ever.”
That seemed simple enough at the time, but then we got going. “So I want to do this marketing program and that sales promotion and the next one,” he said, more or less, happily. “No,” I said, unhappily, we don’t have the money.”
“But we will. This will pay for itself many times over.” He was right sometimes and I was right sometimes, but we didn’t get along. Making cash flow the priority is often a matter of survival for real business, but it’s torture for somebody who believes you can spend money to buy sales. If you don’t have somebody else’s money to spend, you grow more slowly. It doesn’t mean you don’t do marketing or sales promotion, but it changes what you do and what you don’t and how you decide.
Making the cash flow the first priority was a matter of survival, but it wasn’t fun. If you’re going to run a company that way — call it bootstrapping, and respect it, lots of companies do it that way — you’re going to have to turn down some marketing expenses.
So now, if we’ve established cash as first priority, consider growth vs. profits. I always wanted growth first. Believe me, those two fight all the time. You’re steering a company with marketing expenses, and that’s a constant interplay between growth (more marketing expense) and profits (less). And please note that pricing seems a more obvious knob to turn between profits and growth, but I don’t like that one because I believe that in our more complicated markets these days a lower price doesn’t always generate higher growth. Sometimes lowering a price hurts credibility, and doesn’t help sales. For example, how do you feel about really cheap sushi?
My sales-oriented once-upon-a-time partner hated my cash flow being the first priority, but he was consoled somewhat with growth coming before profits. As we worked together for a year or so before breaking up, it became increasingly clear that the growth vs. profits knob is one of the most powerful knob you have in the business. The focus on cash flow wasn’t a matter of choice and we made that clear. Growth vs. profits, however, is a choice you make.
What I’d like to do with this post is suggest that every business is better off for thinking through how it ranks these three factors. You should have it clear for yourself and clear for the rest of your team and everybody else who’s involved with your plan. So put it to music, and choose your song.
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About the Author: Tim Berry is president and founder of Palo Alto Software, founder of bplans.com, and co-founder of Borland International. He is also the author of books and software on business planning including Business Plan Pro and Hurdle: the Book on Business Planning; and a Stanford MBA. His main blogs are Planning, Startups, Stories and Up and Running.