“He has two hands on the ball! He’s lunging towards the goal line…and TOUCHDOWN!”
The scoreboard changes, and immediately, fans and spectators know the home team has taken the big win 21 to 17.
In a sporting event, you can tell who is winning, and by how many points easily. In business, it is NOT that simple.
While most entrepreneurs focus on revenue as the goal, Alan Miltz of Cash Flow Story reminds us:
“Revenue is vanity, profits provide sanity, but cash is king.”
Just like cash is king, so is your mindset. How you think about your organization can determine whether you successfully scale your company.
When starting a business, it’s extremely common to fall in love with revenue without having an accurate understanding of the implications on profits and cash flow.
Not all revenue is created equally. Products will have different selling prices and gross margins. For example, revenue from a high-priced product may have a higher gross margin percentage than a low-cost product.
A sale from a recurring customer may be more profitable than a sale from a newly-acquired customer.
If a customer purchases a product with credit, revenue is immediately recognized, but cash inflow will only occur when they make the payment. This could be one week or two months from the original date of the sale.
As business leaders get deeper into a revenue mindset, they’re only looking at total sales – not actual earnings or the amount of cash coming in and going out the door. Seeing revenue go up can be captivating but it takes your focus away from looking at the metrics that actually tell you whether your business is sailing or growing broke.
Successful companies will identify niches that provide pricing power so they can focus on what matters most:
Let me give you a real-world example.
In 2021, I worked with a 20-year-old water control supplier and service company from Houston, Texas. This client was too focused on revenue to see that they were missing opportunities to generate more profits and cash.
With the implementation of the Scaling Up® platform, the company was able to shift their mindset from revenue to profits and cash. Their focus is now on defining and controlling the specific niche that differentiates them in the market. This saves them from commoditization and downward pricing pressure.
The Results: In the first full year, their bookings increased by 55%. Their revenue increased by 45%. Their gross profits? They saw a 47% net increase. They’re currently on track to accomplish their current 5-year goal in just two years.
The first step to shifting your mindset from revenue to profits and cash is creating visibility. This is where The Power of One tool, developed by Alan Miltz and his partner Joss Milner from Cash Flow Story, comes in. It’s a powerful tool that allows you to see the impact a 1% or 1 day change can have on the seven levers of your business listed below.
Download the Power of One Worksheet
As you complete this worksheet, you’ll identify the seven levers that your company’s management can pull to impact profitability and cash.
Let’s take a look at the Milok Pty, Ltd. case study to gain a better understanding of The Power of One tool.
Milok generated $1,500,000 in net profits but only generated $300k in net cash flow which they used to pay down short term debt. The other $1,200,000 was consumed by an increase in working capital (Accounts Receivable + Inventory - Accounts Payable).
The absence of a focus on cash is all too common and it robs great companies of an opportunity to scale their businesses.
Milok’s leadership team must manage the business in a way that converts the $1,200,000 in profit into $1,200,000 in cash, that amount could be invested in finding the right people, launching an effective marketing campaign, or innovating their products.
Milok needs to identify the appropriate levers to pull in order to improve profitability and cash. Even a small 1% or 1 day improvement across the 7 levels would generate $900,000 in annualized cash flow for the business.
A 1% increase in Price provides $190,000 in additional cash flow while a 1% increase in Sales Volume only adds $43,000.
If you want to apply a discount on pricing, think about the impact it will have on profits and cash. Your sales team may believe a discount in pricing will generate more sales volume. Do they know what % in volume growth must be generated to make up for each percentage point in the discount? In Milok’s case, every 1% discount in pricing requires almost a 4.5% increase in volume to break even on cash. This is called price to volume sensitivity.
Being hyper-focused on revenue distracts you from focusing on profit and cash. Cash and profit generation provide a more accurate picture of how your business is performing. A focus on revenue can cause you to value all revenue equally rather than prioritizing profitable revenue.
When business leaders are able to shift their mindset, they become energized to pursue goals that just a few years ago seemed impossible. As a coach, there is nothing more fulfilling than seeing this happen. I encourage you to focus on profits and cash as your ultimate measure of success.
Your mind is your biggest asset. Don’t fall into a trap of shiny metrics like revenue. Instead, use your thoughts and ideas in a way that drives sustainable business growth.
Are you ready to witness the power of a mindset shift from revenue to profit? Watch the 16-Hour Growth Plan Webinar to learn more about how a mindset shift can impact your ability to accelerate scale.
