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Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

Say What? Cash Is Not King, But Accounting Is? 6

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.

  • http://www.rightoninventory.com John Krech

    Great analysis with open eyes. Love your quote at the end. In the end accounting provides lots of data – it is what we do with that information and knowledge that is key.

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  • Jay Goltz

    Tim,
    Thanks for mentioning my blog. There is one thing you said that I completely disagree with, based on my many observations. “Can you imagine not knowing that the money in the bank is borrowed?” Spoken like someone who understands business. I don’t have to imagine. I HAVE SEEN IT MANY TIMES. They don’t think about it. They think the debt is for inventory, equipment, or whatever. Or, they don’t think about the debt at all. All they know is that there is cash in the bank account so everything must be all right. Then they go broke because they have actually been losing money and the bank account eventually goes bare. I have written about a couple of them. Look at the complete financial meltdown in the housing market. Wouldn’t you think the people would know that they couldn’t just keep borrowing money to pay back borrowed money? They didn’t. I agree that it is hard to imagine, but it happened millions of times. Other than that comment, I believe we are on the same page. Keep up the good work. Call me if you’re ever in Chicago!

    • http://timberry.com Tim Berry

      Jay, thanks for the comment, glad to see you here, and yes, you may be right on that one, I do think we’re on the same page about what really matters. Tim

  • http://www.takechargebuildwealth.com Mimi Plevin-Foust

    I couldn’t agree with you more about planning. I do have a question for you, Tim. What if you’re not a numbers person yet you want to succeed in business? What would you advise?

    • http://timberry.com Tim Berry

      Mimi: there are lots of different ways to succeed in business, and lots of people who don’t deal with numbers who succeed. It takes a lot of talents: vision, imagination, empathy, creativity, lots of others … plus lots of hard work … and maybe luck, although I think luck and hard work are closely related. And it takes selling, making, marketing, managing, not just numbers. If you do it all alone find the time to get the basic numbers, it’s not that hard. And if you do it as part of a team, as most people do, then make sure the team includes some understanding of the fundamental numbers.

      Division of labor is a good thing; not everybody has to be good at everything.

  • http://www.cubert.net Charles Robinson

    I learned this lesson first hand from my dad, who was an electrician. I remember one day he showed me checks totaling over $40,000. I was dumbstruck at our windfall and good fortune and he explained that most of that was already spent. That’s when I got my education on operating expenses.

    After nearly 30 years building this business he sold it to Tony, who had worked with my dad for nearly 10 years. My dad spent the last couple of those years working with Tony to help him be successful, and a large part of that included budgeting. As soon as my dad handed the business over Tony started spending the money as soon as it came in. He was bankrupt in less than a year.