Revenue is Vanity Profit is Sanity Cash is Reality - Redefined

What is your Business ?

If you ask this question many people elaborate about their occupation like the shop they have or the manufacturing of some food itme they do or trading in electronic items they deal in.

Yes that is their busienss but beyond that their busienss is also to generate cash to pay bills to their employees , land lord other creditors and draw for their exense and also add something back into the business to grow the business.

So business is the art or science or both if we wish of balancing our acts in such a way that we are able to genrate revenue , make profits , genrate actual cash out f those profits and also bulid value ( networth ) of the business .

So there is a ols saying that Revenue is Vanity , Profit is Sanity , Cash is Reality .

It is absolutely true the only missing link being Value or Networth which is Continuity

So we can re-phrase it as 

Revenue is Vanity , Profit is Sanity , Cash is Reality & Networth is Continuity

Now let us examine each of tehse aspetcs 

Revenue is only the bluntest of instruments when it comes to measuring business health. All revenue is not equal. We have to look at both margin and the cost of generating that revenue. So while obviously important to grow customers and sales, chasing revenue at the cost of all else is vanity and a potentially fatal blunder. There are companies with USD 1 Billion in sales, who at the same time carry $200 Million in debt and make annual profits of $10 Million .And there are companies with total revenue of $10o Million who are debt free, and have $2 Million in the bank, and make almost $2 Million EBIT per annum. 

Profit is a far more reliable indicator of business robustness, but profit on a P&L can be misleading too! A rigorous P&L will give you a snapshot of your business performance over a set period of time, and it will tell you whether your business model is working. But ‘profit’, on a P&L, is still a mirage. It’s a fairy tale. It’s not real. Yet. You can’t pay next week wages with a set of financial statements, no matter what those statements say.

You need cash. Cash is the love of your life. Wad is God. Your one true friend. The one you can trust. Not everyone agrees by the way. I have been lectured by countless ‘high-flyers’, much, much cleverer than me, who tell me debt is good, using other people’s money is smart, and cash in the bank is lazy money. Most of them are bankrupt now.

Networth is the fourth cmponent which is very important as there may be cash genrate by taking loans or selling assets which will erode he networth and therefore when cash is generated beyond profits source of cash is important .

And there may be exception to this rule in times of expansion when companies may be incurring high depriciation charges because of which though they may be profitable on Cash Basis they be not profitable post Depriciation. So we should consider that into account.

Similar is the case with interest where in intital yers the interest burden may be higher .

A typical example is Amazon Yes, it’s true that Amazon made a net loss of $7 million in the second quarter of 2013 - but looking at profits alone doesn’t always tell the whole story of how a company is performing.

It can often be a lot more insightful to look at earnings before interest, taxes, depreciation and amortisation (EBITDA) which is a metric more widely used in the City to measure performance.For investors, this metric is often a lot more revealing than net profit alone, as it focuses on the cash that the business is actually generating. So, if people were to judge Amazon on its EBITDA - which was $2.92 billion in the trailing 12 months to 30th June 2013 - far fewer people would probably be concerned about its profits.

It’s important to realise that Amazon is making some pretty large investments at the moment and that requires cash.

In 2012 alone, the company spent $3.8 billion on capital projects to enhance its offering to customers and to invest in new and growing categories. By continuing to invest in this way, Amazon will be able to innovate much more effectively, and build the infrastructure that it needs to expand its offering and establish an even more solid platform for growth.

The expense (and associated benefits) of investments like these is yet another reason to look past net profits. This high-level commitment to improvement, growth and future stability should actually be a given for any major retailer of this size, and indeed for any other retailers who aspire to be key influencers in today’s global market.

In actual fact, Amazon barely makes any profit because it doesn’t try to. It would rather focus on satisfying its customers, keeping hold of them, and selling more to them as it continues to expand.

And its shareholders seem pretty happy with that approach. Even though the company reported a second-quarter net loss and weaker international growth, its stock recently hit an all time high.

Amazon understands that this is a sector where resting on your laurels is punished first and foremost by the consumer. So, we should actually be praising Amazon for continuing to evolve its offering in order to react to the ever-changing demands of today’s consumers.

Could Amazon double its profit margins in the next quarter if it wanted to? Probably. But only if it were to stop investing in lots of interesting areas - and who on earth wants that?