Growth vs. EBITDA vs. Cash Flow: Learnings from My First Million Podcast
How do Shaan and Sam think about Growth vs. EBITDA vs. Cash Flow, and how do they adjust strategies in their business? This one talks about their discussions from MFM pod "3 things you need to outperform 99% of entrepreneurs".
My First Million is one of the three podcasts that I listen to on a daily basis. It is probably my favorite; I just love listening to Shaan and Sam shoot the shit on my way to work every day. It's one of those things that are either loved or hated, and rarely anything in between.
I haven't written anything specifically related to MFM yet, but this latest episode called 3 things you need to outperform 99% of entrepreneurs has something directly tied to what I've been learning recently, and that is Financial Statements. About 30 minutes into the episode, Sam and Shaan started discussing Growth vs. EBITDA vs. Cash Flow as a founder's primary focus in operating a company, and how that focus can change the direction of an organization.
My learnings
- For an entrepreneur, the first order of things is revenue. Growing revenue is probably the hardest thing, as you are convincing clients to vote for you with their money.
- But before that, you will need product market fit. Having product market fit will give you the opportunity to grow your revenue. With it, you will feel like the market is pulling you; without it, you will always be chasing clients, and nothing else matters.
- Compared to growing revenue, growing EBITDA (or profit in that regard) is relatively easier, but it requires a certain (different) set of skills.
- A newsletter is an asset-light business; an e-commerce is an asset-heavy business. E-commerce has one unique difference from newsletter, and that is inventory. Having inventory could mean that much of your asset is tied up in inventory, and the business must pay attention to the turnover rate and cash flow. (Shaan went on to say that he thinks e-commerce is a terrible business, even though he is winning in it.)
- Compared to e-commerce, I'd think newsletter is a "better" business since its clients front money to the business before services are delivered. Most SaaS are like this, as clients pay annual subscriptions upfront before the services are delivered monthly. This is a great position to be in.
So as an entrepreneur, you should first focus on income statement and cash flow statement. The former tells you where you are spending money on the operations side, and how much money you are making, while the latter helps you look out for how you are spending and receiving cash, a crucial risk indicator. If you want to know what to focus on as a creditor, an investor, or an M&A department in a large company, read this article.
The Discussion in the Podcast
(Asking Sam) When you were running the Hustle ... You want growth, you want EBITDA, you want cashflow. The problem is when you want three things equally, you usually get none. So they're generally in any business at any point in time tends to be some order of priority. Which of these did you focus on? And was there ever a shift (in your priority) from one thing to another?
I didn't run the business long enough. You know, we sold like four and a half years in. For the longest time, it was revenue that was the number one priority, followed by cashflow, followed by profit. And so what I wanted to do was double revenue every year. So I think we went from like 500,000 dollars in revenue to 2.2 million dollars to like five to twelve or something like that.
And we didn't make a lot of profit along the way. I think the year we sold, we did maybe a million in profit, but our cash flow was high. So I was able to add like two million dollars to our bank account.
(Asking Sam) And explain to somebody who's like, wait, how do you have a million dollars of profit, two million of cash flow? How does that work in a business like the Hustle?
So I'll give you guys a really easy example. So we had this thing called Trends. It was three hundred dollars a year. But for the sake of this conversation, let's just say it was twelve hundred dollars a year.
And if a customer paid upfront, let's say they paid me on June 1, $1,200 for an annual subscription, my cash flow was $1,200. That's how much my business accepted into our bank account. But the way that GAAP accounting, or generally accepted principles of accounting... the way that works is that $1,200 was really only $100 in June, $100 in July, and $100 each month. And so my revenue was only $100 per month.
... And so I'm in this situation right now. I have a business that, my e-comm business, where we've been running it for maybe four years now. And it's doing really well. It's been, I was only growth focused. So I was like you, I wanted to double or more every year. And so we did.
The reason being is typically, not always, typically it's harder to grow revenue, but it's easier to once revenue is grown to become profitable.
Exactly. I think it's the right order of operations. Actually, there's one pre-step even before growth, which is just product market fit. Meaning, have I made something that people want? Do I feel like if I produce this, that there's a market pull for this? So once we verify product market fit, great. Now it was growth. I think in year one, we did six or seven million.
... So we've basically been, you know, uh, growing by somewhere between 50 and a hundred percent every year for the four years, but I have pulled out exactly zero dollars from this business. I have put in my pocket, zero dollars from this business in four years.
I've reinvested everything, but it's not a, oh, I could have took a ton of money out of this business. It's like, well, like for example, one year we basically had no profit. We did, you know, eight figures of revenue and we were break even essentially. And I was like, what are we doing here? How did this happen?
So like the bank, did, but did the bank account ever go up? Like was your, was your cash position ever good?
Well, in Econ, you have one other variable, which is inventory. And so the cash has been pretty steady, but the inventory assets are going up, but they're also inventory that might take a while to move. It might be slow. It might be whatever. And so I don't want my cash tied up in inventory. That is not actually the plan. That's a by-product.
Unless you can pay your employees and bills with inventory, it sucks.
Yeah, exactly. So I've been going through this process where I shifted from where I first was in growth and then I shifted to EBITDA. That required a certain set of skills.
