The cash you don't have is the problem, not the revenue you do

Several major regional banks reported second-quarter earnings this week, and the language inside those calls is worth a few minutes of your attention. Citizens Financial and U.S. Bancorp both flagged tightening conditions in commercial lending, slower approvals, tighter covenant structures, more scrutiny on small business borrowers specifically. This is not a crisis headline. It is a terrain update. If you have been assuming your existing credit line renews the way it always has, or that a new line is available when you need it, check that assumption now while you are not desperate. The owner who calls their banker in a calm month is a different conversation than the one who calls from a cash hole. Go have the calm conversation.

Mike Michalowicz watched businesses die with revenue on the books and nothing in the account. Not bad businesses. Not lazy owners. Businesses that were growing, even, right up until they weren't. The principle he pulled from that wreckage is this: revenue is vanity, profit is sanity, cash is reality. What you earn and what you keep are two different numbers, and most small business owners run their days off the first one while the second one quietly decides their fate.

The formula most owners operate on is Sales minus Expenses equals Profit. Michalowicz argues you flip it: Sales minus Profit equals Expenses. You take profit first, as a fixed percentage off the top before anything else gets paid, and then you run the business on what remains. The discomfort of that constraint is the point. It forces the business to become leaner than you would ever choose to make it voluntarily. Given what the banks signaled this week about tightening credit, the owners who already know exactly what cash they hold and what profit margin they are actually keeping are the ones who will have options. The ones running on revenue hope will not.

Michalowicz tells his own made-it-then-lost-it story in his TEDx talk. Worth the thirty minutes: Mike Michalowicz at TEDxFultonStreet on YouTube.

Learn from someone who's done it: Mike Michalowicz — 'Profit First' is better for entrepreneurs than 'G.A.A.P.'