Making Money Isn't Precise Enough

A client once asked me to oversee an exploratory program. The objective wasn't simply to launch another profitable line of business - we were trying to determine whether an idea the owner valued could be developed into a sustainable operating model.

We had the financial capacity to experiment. There was sufficient operating cash to absorb the costs while we explored different approaches, gathered referrals and work orders, and learned what the program could become.

Early on, we developed metrics around efficiency, including the time required to perform the work and the quality of the services being delivered. But there was a problem.

The program generated revenue, but not enough to cover its expenses.

That fact alone didn't answer the question of whether the program was worthwhile.

What Does the Program Actually Produce?

Some of the program's value appeared elsewhere in the business. The work created opportunities to refer customers into other, more profitable service lines. Those referrals had economic value even though that value didn't appear on the program's own income statement. So, we began incorporating them into our analysis.

We were looking for a sweet spot: a combination of direct revenue, indirect economic benefit, quality of service, and operating expense that could make the program sustainable.

That required us to be more precise about something that sounds very simple:

Are we making money?

In casual conversation, I use that phrase too. Everyone understands generally what it means. But it became inadequate when we needed to make decisions about this program.

Revenue was coming in. In that sense, we were "making money." But revenue isn't profit. And an activity can generate revenue while consuming more resources than it produces.

The owner and I agreed that when we evaluated the program, we would use more precise terms. We would distinguish revenue from profit and direct financial returns from indirect economic benefits.

That distinction gave us a much better conversation.

Not Everything Valuable Is Profitable

The program mattered to the owner for reasons beyond its financial return.

It provided a service the owner believed was valuable to the community and was consistent with the owner's vision for why the company existed.

That mattered.

Financial analysis doesn't make those considerations disappear simply because they are difficult to put into a spreadsheet. Owners routinely make decisions for reasons other than maximizing short-term profit. They invest in employees, communities, customer relationships, reputation, capabilities, and ideas whose returns may be indirect or difficult to measure.

The financial question isn't necessarily whether those things should exist. It is whether the enterprise can afford them.

Over time, we continued adjusting the program. We reduced activities that weren't producing sufficient value and looked for the balance between the program's direct revenue, the additional business it generated elsewhere, and its cost.

But eventually we had to confront a basic constraint.

Over a sufficiently long period, there has to be more coming in than going out.

If the program could not reach that point, then no amount of commitment to its mission could make that particular for-profit model sustainable.

Sometimes the Structure Is the Problem

That realization didn't necessarily mean the underlying idea was wrong.

It raised another question: Were we trying to accomplish the right objective through the wrong structure?

We explored whether the activity might ultimately be better suited to a nonprofit model.

That discussion introduced a different set of considerations. A 501(c)(3) organization isn't simply a place to move an unprofitable business activity. Its charitable purpose and obligation to serve a public rather than private interest imposes their own constraints. The owner's particular vision of the "community" to be served would also have to fit within those boundaries.

Exploring that distinction helped clarify what we were actually trying to build. Eventually, we developed a potential nonprofit model and retained it as one possible destination for the program as the concept matured. Meanwhile, the for-profit operation gradually moved away from activities that could not support themselves economically.

Give the Vision Feet

There is sometimes an assumption that the CFO should always be the person in the room arguing for the option that produces the highest profit. I don't think that is necessarily the job.

Entrepreneurs create businesses because they believe something is worth doing. Sometimes the value they are trying to create is easily measured in dollars. Sometimes it isn't.

The owner's responsibility is to decide what the enterprise should value. Finance has a different responsibility: make the economics visible.

That means distinguishing revenue from profit. It means identifying indirect benefits without pretending they are free. It means measuring the cost of pursuing an objective and being willing to say when the current model cannot sustain it.

The answer isn't always to abandon the vision. Sometimes the work is to find a structure in which allows the vision to survive.

A good financial advisor doesn't have to replace an entrepreneur's vision with a spreadsheet. The job is to help give that vision feet—and make sure the ground beneath it is solid.