I've been having the same conversation with several people lately, which often happens.  It could be one of those "tipping point" things where the same themes emerge in unrelated areas (the stuff about how crowds all stop applauding at roughly the same time).  Then again it could be because it's on my mind, and to a man with a hammer everything looks like a nail.

Today's theme du jour is  profit.  And in particular the lack of it.  I've spoken to several people who are deeply concerned about their lack of profitability, or the prospect of missing profit targets or concern about the profit performance for the year. 

I'm not going to minimise the importance of profit by referring to the standard lines about profit - profit is opinion, cash is fact; profit is vanity, cash is sanity.  Profit is important.  I like paying tax because it means I'm making a profit.  And unless we're in start-up mode, profitability is the ultimate sign of a healthy business.

But in these times, there are things that are more important than profit, at least for a while.

Right now, cash is indeed king.  That's the most important measure.  In boom times, 80% of companies that go broke have had record sales in the previous year, but they run out of cash (or run into the taxman which is the same thing).  What we're seeing at the moment is companies getting stretched by debtors so they're stretching creditors and the whole thing is like a fully extended rubber band.  The importance of cash means we need to have really accurate cashflow forecasts.

The second important measure is retaining existing customers.  We might lose some as they go out of business, but keeping existing clients and customers, even on a lower spend, indicates that our offer is still competitive and still relevant to our traditional market.  if we're losing our existing customers, we need to look at why.  Is it our offer in terms of price or product? Our model?  Is our business dependent on floating on the rising tide or is it something that is out of fashion.

The third measure that matters is picking up new business.  Not only does that tell us that we have an offer relevant for our market, but importantly it provides a base for the recovery.  It means that we're gaining market share, which is putting us ahead of our competitors as we emerge into the weak sunlight of the recovery.

As long as our cashflow is strong, we're keeping our existing customers and we're picking up new ones, the business is in good health.  Instead of seeing our bottom line in terms of lost profits, we should see it as a capital investment in building tomorrow's business.  We may not have chosen to invest in this way, and it may hurt, but all investment requires us to sacrifice income for a period of time.

If we're OK on the measures that matter, then you're not unprofitable, you're just reinvesting.

11 August 2009