When planning a new company, many entrepreneurs think of these three milestones, if applicable:
1. Get funding
2. Get a patent
3. Become profitable
Make no mistake, they’re all good milestones to reach. But in and of themselves, they’re not enough.
“Whoa there, Numbers Boy, the whole point of starting a business is to become profitable. That’s when you know you’ve arrived. Or did you miss the day they taught business in business school?”
Make no mistake, profitability is an important milestone. (And for the purposes of this article, I’m referring to Net Income profitability, or breakeven) It’s a necessary but not sufficient condition, however. Companies that are profitable go bankrupt all that time. New entrepreneurs are often rudely introduced to that old saw “Cash is king.” Put another way, profit is theory, cash is fact. I’m sure you’ve heard someone say that they made money / were profitable “on paper.” That’s where profit lives, on paper – and it’s not the kind of paper they print money on.
Profit is really just a theoretical accounting term. Other than people being impressed that you finally made it that far, it won’t get you far in the real world.
Here, are ten ways you can still go under after reaching breakeven.
Loan payments aren’t part of your operating expenses, only the interest on them is. So if you’re turning a profit of $5,000 a month, you have little money in the bank, and you have a $35,000 debt payment come due, that’s all she wrote.
If you’re using the accrual method of accounting, you book revenue when you make a sale. But what if your customer(s) suddenly can’t pay you? Now the $5,000 profit is even more theoretical, and you can’t pay your bills.
3. Key Personnel Challenge
Business aren’t sales, they’re the people who make them. Few small businesses can withstand the loss of a truly essential person.
4. Supplier Issue
Suddenly your factory in China tells you that the large order they’re manufacturing for you has had major cost increases – past the amount even where you can sell the units at. This happens. If only you could make it up on volume.
5. Legal Problems
Maybe your patent gets rejected, or your trademark gets opposed, or someone sues you for breach of contract. You might not be able to withstand the distraction from your business, much less a full-blown lawsuit.
6. A Big Deal Falls Through
Most of us have spent months working on a killer deal, putting most or all of our eggs in the basket, only to have it go south at the worst possible time. Life happens. Many businesses can’t hold on after their hopes are dashed, and the sales pipeline has emptied out while everyone concentrated on the big “done deal.”
7. A Big Deal Comes Together
Let’s say you do get that huge deal. But sometimes a huge deal between a small company and a monster company wind up being next to impossible for the little company to successfully implement. Customer service, compatibility, shipping deadlines, returns – you can wind up making some money on the deal, but spending all your time so that you can’t make money anywhere else.
8. Profitable, but not Profitable Enough
You’re in the black, not perhaps you can’t “scale” up enough to really make the business worthwhile. Profitability, as many have seen, can be a low benchmark. You’re not in business for yourself to eke by, after all. Hey, you can always make more money with someone else dealing with most of the stress. It’s what they call a “job.”
Sure, you probably could have made money selling buggies and carriages in 1907, but for how long? The world is moving faster and faster, and so are customers’ tastes. If you’re an under-funded tech company, you have to be fast.
10. General Cash Flow
Although many start-ups go under because of some dramatic overnight event, more often, it’s a mundane combination of some of the above factors. It doesn’t take much to strap a small business’ resources, and if you combine debt payments with uncollectable receivables and a deal that falls apart, it could be curtains for you, with them all happening at the same time.
So while being profitable definitely beats the alternative, think more about cash flow. Do cash flow forecasts all the time. Get on a first name basis with your cash flow if you can.
Good luck out there.