Books To Scale is a name that implies you need up to date books before the business and the business owner can start maximizing its financial punch. If the books are not up to date, tycoons often confuse their baby for being not profitable or very profitable. There is a common narrative among entrepreneurs that revenue is king! But, if revenue is king, where does that leave Gross and Net Profit? Plot twist, what about EBITDA (Earnings Before Interest Taxes Depreciation & Amortization)??? Mix in the word “cash flow” and the most educated of business owners will be scramming to find the story that makes them feel good or terrible about their choice(s).
So, which one of these metrics matters the most to you? Like many things relating to financial topics -it depends. Depending on your business structure, net profit will be what the IRS bases your tax liability on. But, that can be manipulated with depreciation to paint a very different picture of your operations.
If you are looking into investing into an enterprise, EBITDA should be the figure you care about most to value the viability of a business. Using gross revenue doesn’t take into consideration operation expenses like cost of goods sold to get Gross Profit. Net profit will have deductions you may not see in the future due to outlier capital expenditures that get section 179 depreciation treatment.
Instagram accounts with millions of followers’ shout “cash flow is king” as their metric of choice to guarantee success! This ideology will get make the bottom half of your balance sheet look scary! In addition, the cost of capital for this strategy will make you really question how this strategy is financially sustainable. There’s a co-mingling between entities factor that will bite most users of this strategy in the future.
Bottom line (pun intended), there is no one size fits all metric that defines a successful business. Regardless of which metric you choose, or how you define a successful business, you need a set of accurate reconciled books, then maybe you can scale.