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Why watching the numbers is the key to success

Author: ICAEW Insights

Published: 15 Mar 2023

“The numbers” may be the language of business, but for entrepreneurs, the figures that matter most aren’t revenue and profit but cash flow, as author and London Business School professor John Mullins explains.

There’s a saying that goes: “Revenue is vanity; profit is sanity; cash flow is reality.” 

For many large listed companies, managing cash flow as if it’s their last pound isn’t on the agenda. They might prefer to use the money to buy back shares of their own stock from their shareholders to increase their value, thereby increasing the chances of potential profit- or share-related bonuses. But for entrepreneurs, cash is the lifeblood that enables their survival. Run out of it and you’re in deep trouble.

But how can being entrepreneurial help you as an accountant if you’re working with a business facing financial challenges? Let’s find out with a lesson from a business move gone wrong – and one that worked out just right.

Walking a financial tightrope

By the time Jay Gupta launched Mumbai-based clothing brand The Loot in 2004, he had already built a successful retail portfolio, including franchised outlets for Levi’s, Nike and Adidas, and was angling for his next entrepreneurial move. He saw an opportunity to leverage his relationship with suppliers to sell goods at highly discounted prices, and won permission from all but two of his franchisors to let him turn eight of his existing stores into The Loot concepts.

Emboldened by this increase in buying power, Gupta decided to move away from the tried-and-tested model of securing the merchandise he bought on consignment. Instead, he began to pay for goods outright as and when closeout opportunities presented themselves. Suddenly his bedroom no longer sufficed as a warehouse. Overheads skyrocketed as his team grew and as he shouldered responsibility for the fees and local taxes that his franchisors had previously paid. By the end of March 2005, despite a now-larger credit line from his bank, the company was stretched for cash and Gupta realised the operational difference between a profitable business and a cash-rich business. 

Over the following years and after various changes in business model, The Loot continued to walk a financial tightrope and eventually all stores were closed by December 2015. Without one source of upfront cash, the business model, with its very modest gross margins, was simply not viable. 

However, what can be learned from this business story is the importance of trust. The Loot was able to grow and thrive for a time because Jay Gupta paid careful attention to paying his first vendors on time and won their trust, which enabled him to open more stores and change direction. Simply put, trust pays with employees, customers and suppliers alike.

Tesla’s unconventional approach to cash flow 

Let’s look at a different entrepreneur now and how an unconventional gamble based on trust – which might surprise a lot of financial professionals – paid off. 

As Elon Musk and his partners contemplated getting Tesla underway back in 2006, they spent a few weeks doing a road show in California touting the new Tesla Roadster – so new that they’d not built any yet – to wealthy and environmentally conscious people who loved fast cars. Before Musk and his partners started building the first Roadsters, they’d already sold 100 of them at a cool $100k each, for cash up-front. That $10m in cash provided Tesla’s founding team with hard evidence that they might be onto something promising.

A decade later in 2016, when the Tesla Model 3 was introduced, nearly 500,000 eager buyers plonked down a $1,000 deposit each for a chance to get their hands on the steering wheel of a more affordable Tesla. Do the maths. That’s nearly half a billion dollars with which to do the engineering, build the tooling, equip the factory, and let the first Model 3s roll off the assembly line many months later.

Not surprisingly, as Tesla began to regularly appear in the business news headlines, pundits who lacked an understanding of the difference between profit and cash flow were wringing their hands. Some wondered whether Tesla would survive 2018. To be sure, Tesla wasn’t yet profitable, because it couldn’t book the revenue for new cars until they’d been manufactured and delivered. Cash flow, however, was a far different story, as every car that a Tesla customer ordered required a cash deposit upfront.

Fortunately for Tesla, manufacturing eventually ramped up, after too many nights of Musk sleeping on the factory floor. Sales picked up and Tesla turned the corner to profitability in Q1 2019. Its stock price took off. Profit, who cares? Investors seemed to like it. But to Musk, cash flow was all that mattered. 

Breaking the rules

If you’re working with a company facing financial problems, thinking and acting entrepreneurially can help you see a different path around any impending challenges. Elon Musk’s audacious approach to securing cash flow by having customers pay in advance for a product that, at the time, didn’t yet exist, broke the traditional rules of business that many large companies still follow today, and demonstrated how entrepreneurs think – and act – differently, which is something I’ve studied for over 20 years. In this time, I’ve learned that many successful entrepreneurs, Musk among them, exhibit one or more of six break-the-rules mindsets that allow them to challenge assumptions, overcome obstacles and mitigate risk. 

The good news? These mindsets are universally applicable whether you are an entrepreneur or not, and mastering them enables you to take advantage of opportunities that present themselves along the way to potential success. Here they are:

  • Ask for the cash, ride the float: entrepreneurs know that getting customers to pay in advance and paying their suppliers afterwards, like Elon Musk did, allows them to put extra cash into growing their businesses.
  • Problem-first, not product-first, logic: entrepreneurs will focus on solving genuine problems that customers are facing as a way to create a thriving business. 
  • Beg, borrow, but don’t steal: entrepreneurs know that borrowing the resources needed to start something new is far better than investing in them.
  • Instead of asking permission, beg forgiveness later: entrepreneurs aren’t deterred by ambiguity in the legal or regulatory landscape. They simply plough ahead and beg forgiveness later.
  • Think narrow, not broad: entrepreneurs aren’t put off by tiny markets, seeing them instead as potential areas to establish themselves and set their businesses up for learning and growth. 
  • Say “Yes, we can!”: entrepreneurs are proactive when prospective customers ask whether they can do something that’s a departure from their current competencies, choosing to say “Yes, we can!” and then figuring out how.

Putting your mindset into action

The coming years look set to be challenging for many businesses, with a potential recession and many difficult decisions ahead. Embracing risk and taking advantage of the potential opportunities that come your way may require you to work in new ways to support a company facing uncertainty. So, for that, I offer you a few tips: invest in trust, solve a genuine customer problem and get comfortable with thinking counter-conventionally. In doing so, you’ll be giving yourself and your company a fighting chance to beat the long odds – and perhaps a chance to change the world. 

John Mullins is an Associate Professor of Management Practice at London Business School and the author of Break the Rules! The Six Counter-Conventional Mindsets of Entrepreneurs That Can Help Anyone Change the World.

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