Over the weekend I read Why Cash Is NOT King by Jay Goltz at NYTimes.com. If you’ve been in entrepreneurship or small business at all, that title is disturbing. We all know cash is king. Profits aren’t necessarily cash.
So what’s up with this? Is it just man bites dog, good journalism because it’s surprising, reversing standard wisdom? Or is there any useful point to it?
Actually, yes, there is a point, but buried it in his last paragraph. It’s in my title. And his contrarian main point is weak. It is good journalism (and he’s writing for NYtimes, and I’m not) but not good business.
So why his title? Well, first he cites the Bernie Madoff scandal, obviously cash without profit because it was stolen. But that’s just a diversion, which really has nothing to do with you or me. Here’s what he really says:
There are many ways to have cash without profit. It could be borrowed, or from investors, or from customer deposits, or from inventory that was sold but not replaced, or from the sale of an asset.
While that’s completely true, it’s also trivial because all of these examples are obvious. Can you imagine not knowing that the cash in the bank is borrowed money? But the exact opposite, profit without cash, is not intuitive, way more dangerous, and way more common. Because they are hidden, run-silent-run-deep problems, not intuitive at all. Profits soar, cash plummets. That’s worse because of the Dickens effect: best of times, worst of times.
Jay does know better. I checked. I found his excellent Six Shocks of Entrepreneurship post from earlier this year. Number two on the list is “the accountant must be wrong” and number four is “where’s all the money?” “Cash is King,” he says. Sound familiar?
But Jay does eventually get to a point worth making: The importance of good accounting and financial management. Most of the deadly cash-is-king problems are caused by sloppy business numbers: overstating profits and missing cash problems because of timing of booking sales, costs, and expenses; calling direct costs or expenses assets; confusing sales with payments, etc. Jay says, in his second-to-last paragraph:
If you are starting a business, running a business or even investing in a business, you should learn basic accounting: income statements, balance sheets, depreciation, amortization, retained earnings. Accounting is not just for paying taxes. It is for knowing how your company is doing, for doing price analyses, for budgeting, for projections and for borrowing money.
Now that I can agree with completely. Good accounting does in fact bring those run-silent-run-deep problems to the surface. And I kind of like, but with one huge addition, his actual conclusion:
Maybe there is no king. It’s accounting, it’s profits, it’s cash, and it’s sales. It’s not catchy, but business isn’t that simple. You need them all. Now that you can take to the bank.
If only he’d added planning in there. Accounting is about what has already happened, while planning is about doing something about it.