Business are built on cash flow not on funding

by Ashvini on October 16, 2014 · 1 comment

in Entrepreneurship

I was having a discussion with my friend about the fact that if a mobile app is successful, then it earns billions of dollars. While Instagram and WhatsApp may be very good examples of how much big a success could be , it is often not the only definition of entrepreneurship.

That gives little comfort to about five hundred thousand or so developers whose app remain in the “not acquired” territory. They are still struggling to make the app seen by people.

The hype given about venture capitalist funding an app or an idea sometimes hides the fact that a business is here to make money. Whether it gets funded or not , it needs to develop cash flow for its existence. When you earn 1 million or $1 , it still is some percentage of the investment that has been made.

Side note : There is a stereotyping of entrepreneurs because of this kind of activity http://www.entrepreneur.com/article/232631

A main difference is in between profit and profitability. Of course with bigger money one can advertise better and get known but still one day one needs to show the profits on the income statement. The better measure of strength of a company is its profitability.

From this article http://financenmoney.in/profit-vs-profitability/, one can easily differentiate between profit and profitability. The profitability is often more important than actual profit because it indicates that business is doing well and it is providing a high return on the invested capital.

That takes me to the original argument that 500000 app developers are waiting for someone to fund them or acquire them so that they can reap in the riches.

A smart business on the other hand concentrates on the cash flow. If there is no cash today, the business shuts down. Period. A smart business waits long time to turn not only profits but also become profitable. A smart business shows its investors that their money is being put in stable long term business which will reap great rewards in future.

It is a good idea to pitch to the money lenders but then without a business model that brings in the right amount of cash, its going to burn up money fast. The dotcom boom ( now almost a memory ) served us good lessons.

Great businesses are those that can set up solid cash flow and get repeat customers. If investing was the only criteria a solid business could be built , we would see thousands of apps listing on public stock exchanges.

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{ 1 comment }

Atinder April 13, 2015 at 10:20 am

Yeah! I always been a that kind of guy, who only invest very little from my own money, I will invest from the income that business is creating. It reduces the loss percentage.

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