Why Profit Is Not Important
By George Marcou
Believe it or not, but the level of profit that a company makes, can be very misleading as an indicator of how successful or stable a business actually is at any given moment.
Businesses that focus on profit figures to run their business can overlook more immediate indicators of the business's health.
Here's why.
Profits Do Not Mean a Healthy Business
As a gauge of how healthy a business may be, the profit figure can be very misleading.
Many a business has failed with the business owner still trying to convince creditors and lenders that the business is "profitable".
The business may well be profitable on paper, but that does very little to help the business to survive in reality.
Profit Figures are Historical
The profit figure is by definition a historical figure based on the collated results of trading that has already passed.
How out-of-date these figures are, depends on how long after the event, the figures are collated. This can vary dramatically.
If profit figures are collated at the end of the month, then the figures are potentially a month out of date.
If they are collated at the end of the tax year as part of the financial accounts, then the figures could potentially be 18 months out-of-date or even more.
This alone makes them unreliable for running your business.
Data that is that old can leave you open to surprises and shocks to your business.
Profit Figures Are Subjective
Profit figures can also be easily manipulated, which further demonstrates that they are not based on reality. If a figure can be altered to show that there is more or less money than actually exists, should you really rely on it at all?
Businesses can generate lots of money, cover all of their costs and still be manipulated to show a loss.
The most recent and high-profile examples of this are of huge multinational companies that operate businesses with very good margins, earn hundreds of millions of pounds and somehow manage to make either a very small profit or make a loss in the countries where the corporation tax burden is higher on company profits.
These examples include:
Starbucks
Vodaphone
Apple
Profitable Does Not Equal Survival
Companies can make a loss and still trade successfully, even when they are a very long way from making a profit.
The biggest examples of this come from some of the biggest companies. Many banks, retailers, manufacturers and service providers made huge losses and yet they continued to trade.
Many have progressed from making huge losses over a number of years to now making large profits again.
What force or mechanism allows them to continue?
In 2009 RBS made a loss of £3billion and was able to carry on trading till in finally made a profit in 2013
LLoyds narrows losses to £570m
http://www.bbc.co.uk/news/business-21626461
Companies that rely on their profit figure are missing out on the real picture and the visibility that gives you more control to run your business.
What Could Be More Important Than Profit?
Any business that carries on generating income, can carry on trading.
Everyone knows that the moment a business runs out of available money, you can no longer trade. Profit counts for nothing if you cannot pay your bills.
When this happens, CASH is the most important thing that a company can have.
With cash coming in, the business lives to fight another day. Without cash, it cannot survive.
You shouldn’t wait till you run out of cash before you realise its importance as the lifeblood of your business. If you have ever been in this position, you will recognise how true this is.
This is the secret behind the survival of any business.
By recognising this fact, a business can focus on generating cash the right way.
Does This Have a Name?
When you structure a business to be successful and stable with a long term future, you need cash flow.
Good cash flow shouldn't be a matter of luck. It can be created by deliberately engaging in business activities that are designed to create it.
Cash flow, unlike profit, can be measured live, daily and even minute by minute. Cash is an instant figure and gives you a real basis to make critical decisions.
Cash is therefore a figure that is much closer to the heart of the business than profit.
Cash figures allow you not just to react and make informed decisions, but also to plan ahead, based on knowing what your current position is.
The cash position can be easily calculated to take into account all factors. This, unlike the profit figure, is an absolute and exact figure. The money either exists or it doesn't, simple as that.
The business that focuses on generating good cash flow as a priority will find that profit is far more possible than when cash flow is given priority over other factors.
Good and consistent cash flow can lead to profit, but profit doesn't automatically lead to good cash flow.