The Two Lethal Parameters of Companies

When we feel unwell or visit a doctor for a routine checkup, the doctor first checks our temperature and blood pressure following our general appearance. The course of action and, if necessary, the direction of treatment depend on the status of these parameters. Even if both parameters are within standard limits, we cannot be told that we are completely healthy, but if either of them is outside the normal range, it is certain that we have a problem. This problem could be a simple issue like the flu that can be resolved with minimal intervention, or it could be a more complex issue like a heart disease that requires long-term treatment.

A similar situation applies to companies. The two most critical, and even 'lethal,' parameters for companies are net profitability and cash flow. Even if both parameters seem suitable, we cannot say the company is 'healthy,' but if at least one of these parameters is within the danger zone, we can consider the company 'unhealthy.'

Contrary to common belief, revenue is not a critical parameter at all. You can easily double your revenue by lowering the prices of your products, but this will only hasten the end of your company.

All parameters other than profitability and cash flow in companies are auxiliary parameters aimed at keeping these two critical parameters healthy. For example, all productivity initiatives aim to increase profitability, while parameters like 'inventory turnover rate' or 'accounts receivable turnover rate' help maintain a stronger positive cash flow.

These two critical parameters that can be lethal for companies need to be closely measured and monitored.

Can you imagine going to a doctor for a checkup and thinking that the doctor is using an inaccurate blood pressure monitor? In that case, a severe heart condition could easily go unnoticed. Similarly, if a company's monthly income statement is prepared incorrectly, the company could be at significant risk while still appearing 'healthy.'

Contrary to common belief, especially in many SMEs, either the monthly income statement is not very 'healthy' or not prepared at all. Unless there is a strong demand from the company's owner or top management, finance departments in companies often prefer not to make the income statement visible.

Companies are living organisms, and to survive in a healthy way, they must have a healthy cash flow and be profitable. Therefore, I recommend company owners and top executives to closely monitor their company's cash flow and profitability (not just revenue) as closely as they monitor their own blood pressure.

Please remember that a company owner who does not know how to read the company's balance sheet, income statement, and cash flow statement will be the last to find out that their company is in trouble. Banks, customers, and suppliers will have already found out.

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