Like most people reading this, I’m a bit of a fan of Dragon’s Den. So I was pleased to see that last night (October 3rd) the BBC was running one of the spin-off programs – “How to Win in the Den”. This particular episode featured, amongst others, Ling of Ling Car Leasing fame.
As I watched, I was rather taken aback when Duncan Bannatyne said something surprising:
“Turnover is vanity, profit is sanity”
He then continued…
“It’s profit that pays your mortgage, it is profit that you live on, it is profit that builds up your pension”
Sorry Duncan, but you’re wrong – profit does not pay the mortgage – cash pays the mortgage. Turnover is vanity, profit is (sometimes) sanity but cash is reality.
This simple mistake from Duncan came as such a surprise. Surely, cash is what The Den is all about? A growing company can make good profits but the available cash is so often soaked up in expanding the working capital base – sometimes resulting in overtrading and collapse. If profit did pay the bills then The Den would be a very quiet place as all those small-but-profitable businesses would not need to pitch for the money.
Later on, Duncan met Ling and she shared with him some accounting figures that were supposed to show that he would have got back his investment. This time, Duncan redeemed himself to a degree. As Duncan pointed out, the profits would not have flowed back to the investor as the business would not have been able to pay the dividends. At least this time he was recognising that he wouldn’t have got a return as the business would not have been able to convert it’s profits into cash.
However, Duncan could have gone further and explained that an investor’s return generally comes from the profit on the business, not the profit in the business. For an investor, the real return comes at the end of the 3-5 year plan. It isn’t the relativly small amount that can be extracted year-by-year that is of interest but the much larger lump sum that comes when the investment is liquidated upon exit. Going back to the point about mortgages, it goes like this:
- Profit – Gets you a mortgage
- Cashflow – Pays your mortgage
- Business exit – Pays off your mortgage
So, the lesson for all entrepreneurs is this:
- Start with a business that makes a profit.
- Run it with a strict focus on cash.
- Develop your strategy around your exit valuation.
Come on Duncan, Cash is King – and the exit plan is the holy grail!
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- 28 Apr 2012Company Valuation Methods – You Need to Plan Ahead
- 17 Nov 2011The Double-dip Failure Shortlist
- 01 Nov 2011Do you really need the cost and commitment of a full time finance director?