Profit is Ephemeral
It took about 4 months of cost-cutting and vendor negotiations for a D2C startup I was working at to achieve cash breakeven. It took us an additional two months to realize that it had happened.
Cash is the number in your bank account at the end of the day. Cash Breakeven, Profit breakeven, unit breakeven, these are abstract and importantly, they are descriptors. These are comparisons of two numbers that do not simultaneously exist in time (ie. cash breakeven is cash inflow and cash outflow, profit breakeven is revenue and operating costs)*. Thus, the measurement is dynamic.
Before continuing in riddles, here’s an example. If you buy Chemical A for $3 a unit and resell it for $5 a unit, you’ve made a profit of $2. But If shipping cost you $1.75, your profit is just $0.25. All good so far. Now imagine you’ve checked your bank account after all transactions and instead of having $20.25 (let’s imagine that you keep $20 of cash on hand), the account has $19.95. After looking into what happened, you realize that the platform on which you sold the Chemical for $5, took a 6% transaction and processing fee (this is a pretty large processing fee but go with it).
There is no big mystery on next steps for your business. There are several different avenues that you could explore to make the transaction positive, including raise prices, changing shipping partners or even the sale platform. That’s not the point. The point is that the transaction does not “feel” different because you’ve lost money due to a processing fee. It is surprisingly easy to sell things at a loss. The business world is opaque and costs are often staggered or hidden. Across the cash cycle of a product there are so many things including transaction fees, shipping, taxes, labor, discounts, marketing that can play a non-obvious part in the profitability of a sale. And all of that is before you try to amortize bulk costs or capex across sales.
Takeaway: When you engage in a transaction, you need to know your cost structure, but that isn’t enough. Again, costs move!
You need to have a framework, whether coded or done in excel, to actualize the metrics that you’re watching. It’s fine to think abstractly of a single unit sale, but when thinking about the overall profitability and cashflow of your business, small choices across thousands of transactions can have large effects. Looking at the money you have in an account will be too stiff and late to allow you to really take the health of your business. No one is going to tell you whether you’re doing good business. You need to build a framework that will tell you.
There is no magic framework that works in every situation but yours should include all costs associated with a revenue transaction, as well as an understanding of how and when the costs are incurred. A good check is accounting for how every dollar involved in a transaction moved. If you can fully understand what’s happening in your bank account, that’s the first step to building out your understanding of profit.
Cash Breakeven vs Profit Breakeven – Profit Breakeven refers to a Net Income of $0. This is Revenue minus all operating costs, but importantly, doesn’t include capex spend or money from financing. Think of it like “if this business was in a box, would it make money”. Cash breakeven, in contrast, refers to the reality, the number in your bank account. Across all operations, did you make money?
