As trusted advisors, we often learn that many entrepreneurs are running their business cash on cash. It might surprise you to learn that the financial aspects of their business are often in shambles for most “successful” entrepreneurs. Some have even taken out loans to float their companies. It usually comes down to two seemingly contradictory challenges:
1. The need to exude trust and confidence to grow your business.
2. The need to demonstrate vulnerability to build trust and confidence.
When entrepreneurs are in financial trouble, they often work harder to exude trust and confidence. This usually only gets them further in debt. As someone to whom entrepreneurs often turn for help, I will outline the most common blind spot.
Many entrepreneurs are on a treadmill. They’re working on the next big deal. Their focus is often on the size of the sale and the revenue it will generate. If they’re running cash on cash, they tunnel in on the revenue they will generate. This tunnelling has the benefit of making them laser-focused on closing the deal. The drawback is that when you focus on one thing, you’re often blind to other things. Most often, that includes expenses.
In many ways, business is simple: Revenue - Expenses = Net Profit
That’s the formula.
Yet, so many get it wrong.
In a recent conversation with a business owner, he explained how he was making more money and paying himself less before the pandemic. Now he is making less money and paying himself more. I said to him, “Language is very important. Can you tell me what you mean by you were making more money?” He answered, “More money was coming into the business.”
What he was doing was conflating revenue and profitability. When he said he was making more money, what he meant was that he was generating more revenue. He was ignoring the ratio between Revenue and Expenses.
What we learned was that he had reduced his expenses. This meant that, although he was generating less revenue, he was now more profitable than he had ever been. Many entrepreneurs make this simple mistake, and it can be a fatal blind spot.
Here’s the big takeaway: Often in our drive to generate revenue, we also increase expenses.
That can come in the form of campaigns, new technology, new hires etc. Driving revenue has a cost. When you tunnel in on generating revenue, keep one eye on expenses. We once worked with an entrepreneur who ran a 25-person company. After some analysis, we learned he could make more money if he scaled back to a five-person team.
For many, the financial aspects of their business are like fingernails on a chalkboard. The financial aspects of your business are the lifeblood of your company and knowing your numbers can make decision-making easy. When we tunnel in on growth, we also need to pay attention to expenses.
We have seen so many entrepreneurs grow their revenue but also increase their expenses. Increasing their expenses can sometimes mean that their profitability is decreasing.
Take this simple insight and build the business that is right for you. If you need help, we can help you create the business model that is right for you. If you want to model the projections of your business, we can help. We work with our clients to help them model their revenue in one and five-year periods. The goal is to help you build a business that’s right for you. Whatever you choose, remember that making more money isn’t only about generating more revenue.