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Showing posts from June, 2018

It's All About Profit. Right?

When I review financial performance with managers of middle-market private companies I find, with few exceptions, that their focus is almost exclusively on their income statements. “It’s all about profit,” they say. “It’s all about the bottom line.” In practice many chase revenue, even unprofitable revenue, but most understand that profit is necessary and that increasing it is a good thing. It turns out, however, that it isn’t all about profit. Profit is very important, but there’s more to it than that. And some of the pieces of the puzzle can be found on the balance sheet. Here's one example I often run through with businesses I work with: Suppose we have Company A and Company B, both in the same industry and making similar products. They each have $10 million in revenue and $1 million in profit. Company A creates its profit with $10 million in assets (machinery, accounts receivable, inventory, etc), while company B creates the same profit with only $5 million in assets. Whic