Name This Tune: Cash, Growth, and Profits

Cash, growth and profits

I want to put some music into your head. Depending on your age, it’s either “Strength, Courage, and Wisdom” by India Arie. Or it’s “Lions, Tigers, and Bears,” from the Wizard of Oz.

Your lyric for this one, however, and regardless of which tune you choose, is “cash, growth, and profits.”

What that would-be musical phrase is about is priorities in a growing business. It’s about business survival and profitable growth.

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.” I saw it as a way to set priorities hard and fast. I also saw it as a foundation 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).  “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. However, 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. It’s all about how to survive in business.

So now, if we’ve established cash as first priority, consider growth vs. profits. Which of those is the next priority?

I always wanted growth to come before profits. But believe me, growth and profits 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 while pricing seems an obvious knob to turn between profits and growth, I don’t like that one.  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 next, 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 above all wasn’t a matter of choice and we made that clear.  Without cash flow we couldn’t stay in business. We had to keep the cash flow positive, first of all.

Growth over profits, however, is a choice you make. You can choose how much in profits you want to keep for yourself or whether to invest back into the business.

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.  How are you going to manage cash flow?  And what level of profitable growth do you want to achieve.

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.  Cash, growth and profits.

Editor’s note: we updated this piece January 2019. It’s still relevant as when first written, serving as a great primer for how to survive in business and achieve profitable growth.

Image credit: Pixabay

Tim Berry Tim Berry is Founder and Chairman of Palo Alto Software, Founder of Bplans, Co-Founder of Borland International, Stanford MBA, and co-founder of Have Presence. He is the author of several books and thousands of articles on business planning, small business, social media and startup business.