I've been working in various businesses for more than 6 years now. I wrote copy and content in service-based companies and have started a few ventures on my own during that time.
I did all kinds of online hustles:
- Launching a digital marketing agency.
- Running my own freelancing practice.
- Dropshipping.
I won't call myself a successful entrepreneur by any stretch of the imagination. I've failed in most things I've started, but I've learned a ton. In the past year, I've fundamentally changed how I look at businesses. Yet, I keep seeing people making the same mistake as I did - thinking about them incorrectly. They think running a successful business is about profit.
It's not.
It's about something else. Something much more valuable. By the end of this article, you'll know what that is and why it is more important than profit.
Profit is the Wrong Metric in Business
If you go on Instagram or Tik Tok, you'll see all types of "online business gurus." There is the "wannabe Alpha male" business owner who tells you to hustle 24/7. You also see the typical real estate douche who advises you to buy property because the price always goes up.
There's an entire Twitter meme page devoted to them called "TikTok Investors."
You can check it out here, it's pretty entertaining.
If you watch these videos on "biz IG or Tik Tok," you'd think everyone and their mother are running a successful business.
After all, they share these insane "profits."
"I've made 3 million in profit running my online digital agency."
"We did over 10 million in profit with our ecom store."
"[Insert a high profit here made over a short period of time.]"
I used to get sooo jealous watching these videos. Now, I can't take them seriously.
Because, in most cases, these people are misleading you with these "profit" numbers.
Here's why.
Profit = revenue - expenses.
So if you run, let's say, an online freelancing practice and close four clients for $2500 a month each, you earn $10k. This business model doesn't require a lot of investment, so you can do all your work from your laptop. You have little to no operating expenses, so you'll be insanely profitable.
If you'd share your profit margins, people will think you're running a successful entrepreneurial venture. While this is good, it's distracting you from what truly matters in business - cash flow.
Introducing the Only Metric That Matters in Business - Cash Flow
First, we need to separate cash flow and profits. As we already established, profit = revenue - expenses.
Cash flow = cash inflows (cash and cash equivalents that come into the business) - cash outflows (money that comes out of the business.)
You need to use a cash flow statement that shows your inflows and outflows to track your cash flow. But why is cash flow a more important metric than profit?
Here are a few reasons:
- Your cash flow shows how well run your business is.
Let's go back to our freelancing example. You've closed 4 clients for $2500 each and had your first $10k month. You're profitable. But how many clients can you retain over 3–6–12 months?
After all, when you're a freelancer, you're working as a contractor, so it's likely that you'll have a higher churn. So everyone can have a profitable month, quarter, or even a year as a freelancer. But few businesses can generate healthy and consistent cash flow over time.
These types of ventures have rock-solid business processes that literally print cash.
- Positive cash flow = business growth.
Solid cash inflows on your balance sheet allow you to expand your business. You can more easily attract investors or get approved for a business loan. To be a successful entrepreneur, you must focus on managing a solid balance sheet, not the profits.
3. Predictable future cash flows show a healthy and solid business.
If you want to be a successful entrepreneur, business growth is one of your main objectives. And the best way to predict your business growth is to focus on building a business with positive and predictable future cash flows.
4. It's hard to manipulate your cash flow.
If you're a nascent entrepreneur, you don't realize how easy it is to manipulate your profits. You can always write off to offset some of your operating expenses. But you can't manipulate your own out of a bad cash flow statement.
5. Makes your business recession-proof.
A good business owner knows how valuable it is to have a steady cash flow in times like these. While companies are laying people off, businesses with solid cash flow statements can thrive.
You can hire more people and increase your marketing budget while your competition suffers.
Positive Cash Flow > Profit
If you're interested in launching a business or are a nascent entrepreneur, don't get distracted by these "online gurus." Let them focus on flexing their made-up profits.
In the meantime, launch a business venture that gives you a positive cash flow statement after a positive cash flow statement. It's one of the best ways to ensure you survive and thrive in this recession.
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Splash Photo by Alexander Grey on Unsplash