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Why Your Revenue-First Strategy is Doomed
The sad truth is that 50 percent of new businesses fail in their first year, and many of the rest only hang on for another year or two. After pouring your heart and soul into achieving your goals, it is a tragedy when finances force you to close your doors. Why Your Revenue-First Strategy Is Doomed
Most entrepreneurs launch their start-ups hoping to become the next Airbnb, Uber, or Pinterest. In other words, they are hoping to see massive revenues virtually overnight. Unfortunately, this revenue-first strategy only offers the illusion of success. Out-of-control growth requires a constant infusion of cash, which typically means debt in the form of loans and credit cards.
Excessive debt means walking a constant tightrope. Cash flow is always at a critical level, and these companies are managing from week-to-week and check-to-check. The problem grows more serious as sales increase, and the only hope for solvency is to keep sales perfectly level. Any decrease makes it impossible to pay the bills.
The Profit-First Philosophy
Taking a profit-first approach flips the entire revenue-centric financial formula on its head. Instead of focusing on growth as a solution to cash-flow problems, this philosophy ensures your company always has cash on hand. As any business person knows, Sales – Expenses = Profit. However, this formula puts profits last. The profit-first philosophy incorporates profitability into every element of business operations, using the formula Sales – Profit = Expenses.
At first glance, this might seem like a minor change, but consider the ramifications. When you remove profits from the expense budget, you are forced to rethink where and how you spend your money. You will naturally make better, more frugal choices in areas where you might otherwise be tempted to splurge – marketing, for example – and you are more likely to forgo pricier office space for a less-expensive option until it makes financial sense to relocate.
The Basics of Putting Profit First
There are four principles that form the foundation of the profit-first philosophy, and they are shockingly simple to implement. Of course, profit-first practices might mean you are not be able to expand as quickly as other start-up companies, but when you grow, you will do so at a sustainable pace. Meanwhile, every transaction brings profit into your business, guaranteeing long-term success.
No matter where you are in the lifecycle of your organization, you can incorporate the profit-first principles into your business. A qualified Profit-First Professional can assist in measuring your current financial health, structuring your short- and long-term goals, and getting the right processes in place to create profit year after year.
Your business model can only succeed if you can balance growth and profitability. Sadly, far too many start-ups don’t get the formula right, and they expand so quickly that they never dig their way out of debt. Don’t make this mistake. For more details on putting profit-first practices in place, work with a Certified Tax Coach.