[Editorial notes: Guest post contributed by Rohan Bhansali, cofounder of Gozoop.The post talks highlights why cashflow and profit are two different things; and what bridges the gap is good financial management practice.]
Like most entrepreneurs out there, I love, lust and value passion more than profits. Gozoop was a derivative of pure start up passion that Ahmed, Dushyant (my friends and cofounders) and I shared. Money was never prime motive.
Luckily for us, our personal bank balances were nothing to brag about. Nor were VCs enthusiastically knocking on our doors. I used the word LUCKY because our situation organically pushed us to understand the art and science of Cash Flows very early on. And for me this understanding is nothing less than Gold.
Being self-funded, we were pushed to bootstrap. We were pushed to hire smartly. We were pushed to be bold enough to say NO to an unprofitable businesses no matter how popular the brand (you know how tough this can be). We were pushed to travel in Mumbai locals when the Olas and the Merus seduced us with their air conditioning.
Perhaps most importantly, we were pushed to analyze our cash flows, sales targets and profitability regularly – this helped us sustainably extend our passion into a profitable & sustainable business.
My love for mathematics, urges me to equate passion and profits through a much simplified formula:
Passion x Financial Discipline = Sustainable Business Profits
Financial discipline, the missing link between passion and profits, is thus the protagonist of this conversation. The topic is broad but can be narrowed down to its 3 very core components.
1) Sales are important
I have seen quite a few entrepreneurs dedicate their entire time and resources on secondary matters – perfecting the product, creating a logo, setting up the right legal structure, spending days contemplating on brand names and domain names. Of course, these are important. But they are of fading value (dare I say no value) if you can’t bring in the sales.
You may have the best product, the quirkiest brand name and the fanciest logo BUT if you can’t sell it, then sooner or later you will have to shelve it.
2) Profits are even more important
A lot of businesses sell their products at a price lower than the one at which they source it. That is, they run their business at an operating loss and later make some funny accounting adjustment where they amortize the loss in marketing expenses.
I must admit although I never understood this, I always believed there has to be some underlying sense in this strategy since so many businesses do this. I was wrong. This stands and remains senseless. If you don’t believe me, you haven’t been keeping yourself updated with the ecommerce business in India.
3) Cash Flows are Most Important.
I like my sales, I love my profits but what I really worship is cash flows.
The only thing more important than profits is the realization of profits – client payments. Truth is, many business to business invoices are put on lower priorities vis a vis rent and credit card payments. Have a good payment collection strategy and follow up on it regularly.
I have seen one too many businesses shutting down due to bad cash flow management. Remember, profits on books don’t pay the bills, cash balances in the bank do.
My role in Gozoop gives me a chance to regularly interact with amazingly impressive people. I deserve zero humility points to admit that most of these guys are way smarter than me. Their amazing ideas and innovations consistently make me question the quality and quantity of my brain cells.
Although I continue being surprised as to why a lot of these guys do not end up building a sustainable business, I have enough evidence to deduce that financial discipline does not come naturally to many (specially to right brained creative entrepreneurs). I struggled quite a bit with this discipline initially, often seeing it as a deterrent to my passion. But it’s something I just had to adopt and implement to continue pursuing my passion – building a good Gozoop. And so I did.
There is a line in the movie “The Great Debaters” that I love – “We do what we got to do so that we can do what we want to do.”