4th Key Shift: Revenue to Profit and Cash

There are 4 major shifts that a startup needs to make in order to be successful in their scaling-up journey. Driving Revenue to validate your product/service's commercial value is key as a startup, however, as you pivot to scale, it is also important that you have clarity and can validate your profit model. In this article, I will discuss 5 reasons why you need plenty of cash to scale and grow, and the 10 ways to improve your profit and cashflow. It is not smart to scale an unprofitable business: instead of focusing on driving sales volume, spend some time on tweaking and finding your perfect profit model.

Articles mentioned in video:

Fred Wilson: "Negative Gross Margins" https://avc.com/2015/10/negative-gross-margins/

Toby Clarence- Smith: "Don't scale an unprofitable business" https://www.toptal.com/finance/interim-cfos/unit-economics

Watch this 3mins video about this shift...

TRANSCRIPT:

Today, I'm gonna share with you the 4th key shift from startup to scaleup: Shifting the financial driver from focusing on only Revenue to Profit and cash. 

As a startup, having revenue is the commercial validation that you have provided value through your product/services. However, when you are pivoting to scale, it will be smarter to have the right business model and strategy that will give you profitable growth, because you will need lots of spare cash to:

1. Reinvest into growth. 

2. Reduce dependency on funding through debt and equity.

3. Create buffers/cushions for your mistakes, because you are human and part of the scaling journey is making mistakes in hiring or in your plans & financial estimates, but you will still have to pay for it, so it is best if you reflect frequently and learn fast.

4. Create buffers for unforeseen circumstances that are not in your control like competitive moves, regulation changes and natural disasters that have an economic impact or cause delays.

5. Create buffers for cost of change: when growing faster by 30%, you are constantly upgrading internally or levelling up, and Change costs money.

Bill Gates says that when he was building Microsoft, he made sure that he had 12 months of cash to sustain operations with no revenues.

As a startup, you are trying to drive revenue to a certain volume to break even. That's why VC loves it if you have worked out your unit economics model and have clarity on your pathway to profitability. 

Fred Wilson says in this blog here: one of the key reasons for the death of high growth and well funded startups is because of the negative gross margins that they did not fix, and ultimately the borrowed money will become impatient and expect returns, and valuations without liquidity is just paper that you can't eat. 

Even Unicorns can become extinct dinosaurs if they don't fix the profit problem. If you're still not convinced, read this other article here. 

That's why Revenue is Vanity, profit is Sanity and Cash is King 

So, as a Scaleup, you will need to start looking at the business from a profit and cash lens, and tweak or change or improve it with a holistic view towards profitability for your sanity's sake.  Here are 10 ways to improve profit and cashflow: 

1. Appropriate Tax strategies -- please consult the tax experts accordingly

2. Optimised Overhead expenses -- most smart business owners know how to optimise this with help from a good accountant.  

3. Optimised Operating expenses

4. Improve Cash flow Cycle and process in terms of timing, frequency, formats & types

5. Review Productivity and Efficiency of key processes 

6. Review Product/Service line Profitability 

7. Review Customer segment profitability

8. Pricing Strategies & Model 

9. Overall Business Model

10. Clarity on your Economic Engine or profit model   
    

One caveat is that you also need to have clarity on the key activities, process, resources and assets that are creating your differentiation or proposition, and then make sure that they are untouchable, because you want to avoid unknowingly killing the goose that lays the golden egg when you are on a cost cutting spree towards profitability.

So, are you working on your profit model, or are you scaling into never never land?