Cash is real, profit is just an opinion

Sometimes I hear very convincing pitches from healthcare entrepreneurs about their projections of future profits. These projections are usually followed by an “and let me tell you something, this is a conservative estimate, we have been very prudent in estimating our future profits”… Smile.

I had a nice chat today with some very energetic entrepreneurs, and while discussing with them the meaning of a “conservative estimate”, I remembered a very powerful lesson I received some years ago. A company’s profit after taxes (also called net income) is an arbitrary figure, obtained after assuming several accounting hypotheses regarding expenses and revenues.

Without getting too technical, the classic definition of net income is revenues for a period less the expenses that enabled those revenues. In spite of its conceptual simplicity, net income is based on a series of premises that could easily alter the result. The treatment of depreciation, the scheduling of expense accruals, or the allowances for bad debts, for example, can significantly alter the final net income.

Cash flow, is an objective measure, a “powerful” figure that is not subject to any personal criterium. It is not a matter of opinion, is the real output of our start-up. As one friend of mine once taught me: “Cash???... In my pocket”.