01/09/2024
= The Big Lie of Entrepreneurship {which no one questions} =
The boardroom was stunned. You coulda heard a pin drop.
The Entrepreneur spoke: “Shortly after I’d won a major fast-growth award, I had the weirdest day. In the morning I had a photoshoot for the award. Then, that same afternoon, I met with my my attorney’s office to discuss our options to avoid bankruptcy.”
Publicly, the Entrepreneur was seen as a roaring success. He was weeks away from trotting across the stage to collect his glassy trophy and deliver a victorious acceptance speech.
Privately, tho, he was panicked and teetering on bankruptcy. HE considered some very dark thoughts.
Unfortunately, his story isn’t unique.
I’ve seen the financials of too many companies where revenue grew and grew, but profitability shrunk and shrunk until it was negative. If it stayed negative for too long, they faced bankruptcy.
In one case I advised directly, the company crossed $10M in revenue with ever-worsening margins. I told them they needed to fix margins immediately, even if that meant slowing down or reducing sales, or else they'd go bust.
Unfortunately, they didn't listen. My prophecy came true.
I’ve even heard of business liquidators - the people who walk into businesses to sell things off after a biz goes bankrupt - talk about seeing Inc 500 / 5,000 plaques in the trash. And these plaques were only a few years old.
I, myself, faced a similar dynamic.
When the pandemic hit, my company’s revenue grew faster than we could handle, and suddenly we were losing money month after month. Revenue skyrocketing, but margins cratering.
Thankfully I saw it happening and knew what to do. We reined back revenue (literally saying “no” to many new clients!) until we could get our profit margins back. We did, it saved the company, and now we're in good shape again.
Which brings us to this, The Big Lie of Entrepreneurship: "Sales Cures All.”
And it isn’t just the fast-growth awards like the Inc 5,000 which perpetuate this.
In countless Masterminds, I’ve observed how no one seems to question the role of revenue.
Nearly every Mastermind focuses, nearly exclusively, on how we get more sales…. or its sister metrics, such as: sales calls, opt-ins, webinar attendees, clicks, calls, followers, list size, book sales, podcast downloads, etc… everyone just marches along believing the same thing… more customers means more revenue, and more revenue must be good, right?
Now, I don’t blame Entrepreneurs for thinking this way, because I used to be one of them. No one teaches us Entrepreneurs how to navigate finance.
Usually we just look at our bank accounts. If we think we’ve got money, we spend it. If we don’t, we don’t.
Or the polar opposite: we’re so terrified of spending anything that we spend nothing at all and totally stifle growth, missing out on awesome opportunities.
But no one questions this so-called truism that “sales cures all.”
That is, until you’re staring down the barrel of payroll you can’t pay. Or paying vendors. Or paying the credit card. The list goes on and on.
I’ve been there. All Entrepreneurs have been there.
So if revenue isn’t the oxygen of business, what is?
CASH.
{And, I believe more specifically, FREE CASH.}
Imagine a scuba diver. They’re excited to explore a shipwreck, seeking great adventure and great treasure. That’s us as Entrepreneurs.
Adventure and treasure, let’s go!
If that diver runs out of oxygen, tho, they’re in dire trouble.
We Entrepreneurs mistakenly believe sales are the oxygen of our businesses.
But that isn’t true.
Many businesses live without revenue. All you have to do is look at the hundreds (thousands?) of tech startups which have zero revenue (“pre-revenue” they call it) yet they still exist, make payroll, and keep existing month-in and month-out.
How can that be?
Even tho they have no revenue, and they’re negative-profit (losing money every month to salaries, rent, etc), they have cash… and cash is oxygen.
And in their case, their cash comes from investors, not customers.
So if the oxygen tank of a SCUBA diver is cash, not revenue, then what is the role of revenue? Revenue is an accelerator.
So that makes revenue the flippers!
As in, the flippers on the diver’s feet. Revenue, like the flippers, just accelerates the direction a diver is going. If they’re headed for the treasure, then the flippers get them faster.
If, however, the diver has made a mistake and is accidentally swimming the wrong way, getting further and further away from treasure, then the flippers are their worst enemy - the flippers take them the wrong direction faster than if they had no flippers at all.
Revenue is the great accelerator and amplifier of any business.
If a business is negative-margin, losing money every month, then the Entrepreneur does something to double their sales, they’ll just go bankrupt twice as fast!
As I’ve said many times in the board room, “Revenue accelerates what you’ve got. Don’t multiply dysfunction.”
How can you have dysfunctional revenue?
Here’s a few examples:
1. You sell an online course for $997, but it costs you $2,000 in ads to make one sale, and you don’t have any back-end product to cover the difference. You lose $1,003 every time you sell another unit.
2. You are a service provider and you have ultra high maintenance clients who are a royal pain in the buttocks. In fact, your labour costs to pay your team to deal with all of the non-stop requests from your PITA clients mean you lose $500 on every client. More revenue just means more headache clients unit you simply give up, or go bankrupt, or both.
3. You have an eCom store, and you sell a product for $20, but the landed cost is $25. That means you lose $5 every time you sell another unit. More revenue just accelerates your demise.
(Landed cost is the total of all costs to get a product to a customer’s doorstep: manufacturing, shipping, customs, duties, taxes, tariffs, insurance, currency conversion, crating, handling, etc.)
These are all examples of negative margins.
But - believe it or not - negative margins aren’t all you need to look out for. A company can have *positive* margins and still run out of money.
For example, if a company lands a major contract. Let’s say a whopping $1M sale to provide parts to a Fortune 500 company. Going to Disneyland, right?
Not so fast.
It’s going to take 90 days to fulfill the order. The Entrepreneur has to pay all costs - parts, labor, etc - to fulfill on that huge order.
The Entrepreneur has to pay all of those costs each month for three months.
All the meanwhile, if the Fortune 500 company is only paying for their order upon delivery, that means the Entrepreneur has ZERO cash inflow, but has massive expenses up-front, causing huge cash outflows.
If the Entrepreneur doesn’t have enough cash to cover monthly expenses + production expenses on this order, the Entrepreneur literally goes out of business, even tho a cool million bucks is out there on the horizon waiting for them.
{I’m guessing this biz would find a way to finance themselves with short-term loans until the big payday comes… but you can see my point here.}
Ultimately, the Big Lie of Entrepreneurship is that Sales Cures All.
It doesn’t. In fact, more revenue can actually bankrupt your business.
There’s a funny expression, “Be careful how your business grows, or else you’ll *grow* broke!”
So what do we do?
Pay attention to these four things:
1. your direct costs: what does it cost for us to make and fulfill the next sale? This includes acquisitoin costs (ads, affiliates, sales commissions, etc)
2. your indirect costs: what does is your overhead each month?
3. cash inflows: when do you collect cash from customers and investors / lenders?
4. cash outflows: when does cash leave your bank account to pay vendors, lenders, and investors?
This all boils down to:
- Make sure your revenue exceeds all expenses.
- Make sure your cash inflows exceed all cash outflows.
Then you'll be good.
And once you're profit-positive, and cashflow-positive, THAT is when you've got a winner, and THAT is when you dump tons of time, energy, and money to getting more customers. Now you're multiplying and accelerating success.
As my former mentor Keith Cunningham famously says,
“There’s nothing worse than running in the wrong direction, enthusiastically!”
Keep building that margin and cash,
Tim :)
