Do You Think Profits First?

06/12/2014 12:44 pm ET | Updated Aug 12, 2014

I've written forever about why profits are more important than growth. It's funny how the people who respond negatively to these posts are advisors or people who used to be in business. Business owners who have successful companies seem to get this truth, profits always before growth.

If you own a business you've been down this road.

If you own a business you know that you need to put profits first. If you've been around for any period of time, you've had lean times in your business. You might even have had times where you couldn't afford to pay the bills and had to stop paying yourself.

If you've been in this position you never want to be there again. Once you've experienced really lean times you become paranoid about running out of cash. It's one of the reasons that many business owners are risk adverse. They just don't want to leave it to chance whether their business will be around if the economy heads south.

Advisors think they know what it's all about.

On the other hand, advisors many of whom have MBA degrees have been taught about the theory of growth versus profits. In many schools, advisors have been taught that it's all about growth and then profits will follow.

If you were around during the dot.com bust in the early part of the end of the last century you know how that worked out. Eyeballs didn't make any money and without a real model for producing positive cash flow there wasn't going to be any way these businesses could sustain themselves. Don't use the strategy "if you build it they will come..." I can promise you this rarely works well in the end.

There's the myth of Amazon

We've all read the interviews with Jeff Bezos where he talks about growth being the mantra and he'll worry about profits later. What no one seems to ever ask him is what about cash flow. If they did, Mr. Bezos would have to let the interviewer know that Amazon has amazing cash flow.

There's a difference between generally accepted accounting principles and positive cash. They often are at odds with each other. No one, including Amazon could exist for a long time if they ran out of cash. Generally profits go with cash. Without positive cash there is no business success!

I'm probably repeating myself

I've written about this topic a lot. I would like to add one thing. It's not just about having a little bit of extra cash, it's about having enough to fund a retirement plan, a decent standard of living and a fair return for your shareholders. If you're the only shareholder, then it's a fair return to you.

Too many private business owners don't understand return on capital. You might be surprised what is required for a decent return on capital. It's usually a pretty big number. Understand how return on capital works and how it affects your business.

Make your business sustainable

Businesses that cover their cost of capital are sustainable. They'll have enough cash that when the inevitable business downturn comes along they'll be able to survive the downturn. When times are good you'll be able to put away money that will allow you the option of leaving your business at some point in the future.

Sustainable businesses are fun to run. They create happy customers who appreciate doing business with you. They create enough money to pay your employees fairly. They allow you to pay your bills on time. If you've ever had to delay paying bills, holding raises or not be able to re-invest in your business you know what I'm talking about.

Be smart... create a sustainable business that focuses on cash. You'll be glad you did.