By JAY GOLTZ/December 10, 2010
“Cash is king” is a well-worn phrase that has been used quite a bit over the last few years. I hate to burst the bubble, but it is not true. Cash can be king for a day, a month or maybe even a year, but eventually it will be unseated by the real king: profit.
Don’t get me wrong, cash is critical. Without cash, a company can become insolvent, unable to pay its people, its bills, its other obligations. The end result could be bankruptcy. But without profit, cash will eventually be revealed as a fraud. Think Bernie Madoff. He had plenty of cash, it just wasn’t his. There are many ways to have cash without profit. It could be borrowed, or from investors, or from customer deposits, or from inventory that was sold but not replaced, or from the sale of an asset.
Each of these situations will result in cash, but you will not be king — even if you feel like king (for a while). This is how many small companies get in trouble. They think everything is O.K. because they have money in the bank, and they don’t pay attention to the red flags until the money is gone. I have watched some very ugly business failings that resulted from owners mistaking deposits for profits. They thought they were making money but they were actually digging themselves a hole.
It gets down to a common problem with many small-business owners; they really don’t understand the basic principles of accounting, which means they don’t understand how much money their companies are really making. Most business owners are sales-driven or service-driven and have to spend an inordinate amount of time just finding and servicing customers. Accounting is a burden that most do not enjoy.
But as business has become more complex and money even harder to come by, this approach has gotten even more dangerous. Small-business owners need some new slogans to live by. Maybe cash is king should become cash is critical. Not as catchy, perhaps, but more accurate (and it still has a touch of alliteration). But then we also need a slogan for profit (even though a lot of companies have been sold for big money despite not showing a profit). How about “profits before Porsches?” Or “cash pays the bills but profits pay back the investors.” Again, not very catchy or sexy — unless, of course, you are the investor.
If you are starting a business, running a business or even investing in a business, you should learn basic accounting: income statements, balance sheets, depreciation, amortization, retained earnings. Accounting is not just for paying taxes. It is for knowing how your company is doing, for doing price analyses, for budgeting, for projections and for borrowing money.
Perhaps, even more than profit, the real king in business is accounting. Accounting is king? Again, not very catchy. Accounting is awesome? No, I don’t think the accountants could handle that much power. I know some would argue that sales are king, but the salespeople already think they are king and we don’t need to feed those egos any more. Maybe there is no king. It’s accounting, it’s profits, it’s cash, and it’s sales. It’s not catchy, but business isn’t that simple. You need them all. Now that you can take to the bank.
Jay Goltz owns five small businesses in Chicago.