Why Revenue is an Ego Metric

Craig MacMullin: President & CEO, CEED & SEED, Consultant, CPA, CGA, CBCA, CIPP/C. “There are no problems, only solutions.”

They (whoever they are) say that numbers are the language of business. A company’s revenue, with its impressive figures, is frequently paraded as a badge of honor. It’s easy to be seduced by it, believing that a business with high revenues is invariably successful. However, while revenue is undeniably important, it’s often misleadingly referenced as the primary indicator of a company’s health and potential. This has led to the tag: an “ego metric.” So, why is revenue viewed in this light? And why might we assert that operational cash flow, the lifeblood of businesses, holds more gravitas?

Firstly, let’s understand the term “ego metric.” An ego metric, as the name suggests, is a data point that feels good to boast about but doesn’t necessarily correlate with the real success or health of a business. It’s akin to a vanity plate on a car: while it might look flashy and catch attention, it doesn’t tell you much about the engine’s performance or the vehicle’s overall health.

Revenue, for all its glory, only tells half the story. It showcases the total amount of money coming into a business from its sales but doesn’t account for the expenses incurred to achieve those sales. A company might report revenues of a million dollars, but if it costs them $1.1 million to achieve that, then the business is operating at a loss.

On the other hand, operational cash flow offers a more holistic view. It considers the inflows and outflows from primary business activities. In layman’s terms, it answers the crucial question: After all is said and done, does the business generate enough cash to sustain its operations, meet obligations, and drive growth?

Focusing on revenue alone is like being content with seeing the tip of the iceberg while ignoring the massive structure underneath. Businesses can easily fall into a dangerous trap where they chase revenue growth without ensuring that the underlying operations are sustainable. High revenues with poor cash flow can lead to overexpansion, untenable debt, and eventually, business failure.

Moreover, companies that prioritize revenue sometimes adopt aggressive sales tactics, sacrificing customer relationships and future repeat business. They might offer steep discounts or engage in high-pressure sales, which can drive immediate revenue but erode long-term customer trust.

In contrast, a strong operational cash flow indicates that a business has a solid foundation. It means the company can comfortably cover its day-to-day expenses, reinvest in growth, and navigate economic downturns. Cash flow allows businesses to take advantage of new opportunities without being overly reliant on external financing.

In conclusion, while revenue remains an essential metric, it’s the superficial hero in a much deeper narrative. True business success is built on the backbone of healthy operational cash flow. Aspiring entrepreneurs and investors would do well to remember: it’s not just about how much money comes in, but also about how efficiently and sustainably it’s managed.