As a company that teaches and promotes business acumen, we get really geeked out looking for organizations that “see the big picture,” and Zappos is a company that has caught our attention. If you can’t find a particular shoe around town, chances are they’ve got it – and they’ll let you try it on and send it back to them absolutely free! The #1 online shoe retailer (that now sells clothes and accessories as well) actually likes to think of itself as a “technology company that just happens to sell shoes.”
One of the things we really admire about Zappos is their focus on people – both their customers and their employees. Their exceptional customer service and unique company culture has given them a competitive advantage that has fueled profitable growth over the last 15 years.
Zappos’ unique culture starts with the hiring process. We would love to tell you all about it, but our CEO, Kevin Cope, is a much better storyteller, so we’ll let you hear it from him.
Would you quit your job for $3,000? Would you at least think about it? That offer would be tempting to a lot of employees elsewhere, but we have a feeling that there aren’t many people at Zappos who take the money and run.
Achieving the right balance of people and profit isn’t easy, but Zappos is a company that has done exceptionally well in our books.
If your boss came up to you right now and asked what the difference between profit and cash flow is, would you be able to respond? Or even worse, what if you were asked this question in a job interview. What would you say? If you are at a loss, don’t worry – most people don’t know there is a difference between the two. But while profit and cash flow may appear to be the same thing, they aren’t, and recognizing how each one impacts the business is extremely important. First, let’s take a look at how both profit and cash flow are recorded. Our bestselling book, Seeing the Big Picture, explains it clearly.
“Cash flow is the difference between actual cash received and actual cash used in the process of doing business (from core operations). Each day, month, quarter, and year, a company receives a certain amount of cash and pays out a certain amount of cash. It’s that simple. Analysts look at cash flow carefully because it’s a very real measure of how a company is doing (whether it will be able to pay its bills tomorrow or next week or next month).
Profit, on the other hand, is revenue from the sale of services and products–whether payment in the form of cash has been received yet or not–minus all expenses–expenses paid in cash, expenses to be paid in cash at a later date, and expenses accounted for in other ways.
While you could say that the profit isn’t ‘real’ because the cash hasn’t moved in and out of the company, it’s still important to know whether a company is earning income (making more than it’s spending) from its daily operations over a period of time. If we didn’t calculate profit (or income) this way, a company could appear to not earn any income one month, be hugely profitable the next, and so on, depending on when its bills are due and when its customers pay their debts. But that wouldn’t be a very good indicator of how consistently it’s earning income from its core operations, would it? Even if its financial performance was steady overall, it might seem erratic if we didn’t follow this type of accounting system, which is called accrual-basis accounting.
Another way to think of accrual-basis accounting is that it tracks transactions. Sales, expenses, and profits are recorded when the transaction is made. Apple records the sale of a computer when the customer picks it up at the store and the expense for making the computer at the same time, even if the customer arranges to pay for it over several months and the cost of putting the computer together was paid a few months before the sale was ever made. Small companies may use cash-based accounting, in which you record a sale when cash is received and expenses when they are paid.”
To Sum It Up
Simply put, profit is generally recorded when the sale is made and cash flow is recorded when the money is actually received.
Now here’s something to think about – can a profitable company go out of business? The answer is YES! Let’s say you own a computer company and are struggling to stay in business when you make a huge sale to Company X with an agreement to get paid in one month. You record the profit now (when the sale is made) but in two weeks, Company X goes out of business and is unable to pay you. Even though you show a profit, you don’t generate the cash you need to sustain the business and may have to close your doors.
You may be asking yourself, “Why should I care?” or “Does it really matter if I know this or not?” (Just don’t ask these questions to your boss). Well now that you know how cash flow and profit are measured, you can start making conscious decisions to improve each of these metrics in your company. If you are in sales, do everything within reason to collect payments sooner rather than later (preferably point of sale). If you are in a position to pay your suppliers slower, do it – though you will want to be careful not to incur any late fees or damage your relationships in the process. Also, anytime you can cut costs or sell more, you are improving your company’s cash flow and profitability.
Do Something About It
This is great and all, but if you don’t do anything about it then you might as well have just watched an episode of Gilligan’s Island. So take a moment to think about the specific ways you can improve cash flow in your company, write down 2 or 3 of these ideas (no, seriously – write them down right now), share them with a colleague or your boss, and then put them to action. And just remember to shoot us a thank you letter when you get a promotion.
Pets.com became a publicly traded company on Valentines Day 2000. Overnight it raised 82.5 million big ones. In their Prospectus, they listed 7 keys to their strategy and over 30 risks related to their business. While the risks were significant, the real problem was that none of their 7 keys represented any type of sustainable advantage. There was nothing unique about Pets.com and so they tried to compete on price – actually selling products for less than what they bought them for and offering free shipping. Imagine that… shipping heavy bags of dog food for free and for less than what you bought it for. Doesn’t sound very sustainable. On Election Day, just 268 days after Pets.com’s IPO, George W. Bush would become the 43rd President of the United States and Pets.com would go out of business. That’s like losing just over 307 thousand dollars a day! While investors lost millions, at least some of their money was spent on memorable commercials.
What do you think it means to have a sustainable advantage?
As you look at Pets.com’s strategy can you identify what would make them unique or different from other pet supply stores? Discuss how Pets.com tried to compete on price and talk about why that would be a challenge.
Point out that there were 4 online pet stores in 2000 and lots of brick and mortar stores to complete against. How hard would it be for competitors to implement parts of Pets.com’s strategy?
What do you think our company’s sustainable advantage is? What makes us unique in the marketplace? What would our competitors say was their sustainable advantage?
As you look at Pets.com’s risks how well do you think their strategy addressed those risks?
Which risks do we share as a company? Some of the bolded items in the list are common risks many companies face.
What has our executive team done to mitigate some of our risk?
What is our team’s strategy and how well does our strategy align with some of the risks that our company faces?
Seeing the Big Picture
As a team, write down some of the risks you need to plan for. You can refer to Pets.com’s risks to help brainstorm some ideas. For example, an HR team might share this risk with Pets.com: HIRE AND RETAIN PERSONNEL An IT team might share this risk: SYSTEMS FAILURE OR DATA CORRUPTION Discuss the relationship between risks and a sustainable advantage. What would happen to your company’s sustainable advantage if these risks were taken lightly? Challenge your team to use their business acumen to improve processes that mitigate risks and ultimately help your company maintain or achieve a sustainable advantage.
If you and your team have the book Seeing the Big Picture (Greenleaf, 2012) turn to page 10 and read the section: Influencing the Whole
Before there was an Amazon, there was the paperback version – the Sears catalog. Started in 1893, Sears was America’s top retailer for nearly 8 decades. At one time, 3 out 4 Americans would shop at a Sears in the course of a year and Sears’ gross sales would account for 1% of the United State’s gross national product. Sears was big business and now they’re barely limping along. What happened?
This statement from a 1978 top secret executive report might give us some clues:
“We are not a fashion store. We are not a store for the whimsical, nor the affluent. We are not a discounter… We are not a store that anticipates… And we must all look on what we are, and pronounce it good! And seek to extend it. And not to be swayed from it by the attraction of other markets, no matter how enticing they might be.”
Well, they weren’t kidding when they said they’re not a store that anticipates.
Acumen in Action™
Share the online slideshow in your next meeting and discuss the following with your team:
What did Sears not see?
What innovations helped Wal-Mart win?
If you were Sears’ CEO back in 1978, what would your strategy have been?
If you were Sears’ CEO today, what would your strategy be?
What do you think, does our company watch for milestones or enact them? How about our team?
What can we do better to anticipate the future?
Seeing the Big Picture
Give each team member a index card and on one side have them write down a future that they would like to see unfold. For example, a team member might identify a future where they complete a project successfully or they might see a future where they make it to President’s Club.
On the back of the card have them write down the steps, or milestones, that will enable that future to occur.
Finally, challenge them to use their business acumen to think of ways that they can deliberately enact the steps that they’ve identified (not just watch them pass by).
You may want to review these cards periodically in future meetings.
If you and your team have the book Seeing the Big Picture (Greenleaf, 2012) turn to page 88 and read the section: Anticipation and Innovation
A group of computer engineers were challenged to, no surprise here, figure out ways to support their company’s initiative to cut costs.
One would think that a group of geeky computer engineers would come up with some new fandangled technology or some complex algorithm, but instead of overthinking a problem, or worse, overthinking a solution… they came up with a simple idea that was easy to implement. In fact, the popular TV show MythBusters proved that their idea really does save money. Further, the engineer’s innovation helped support their company’s environmental initiatives.
See if you can guess who this company is…
Acumen in Action™
In between each slide have your team write down their guess of who they think the company is. Tell them that if they shout out their guess before the big reveal at the end they’ll be asked to pack up their stuff and security will escort them out (kidding, but seriously keep it to yourself). Once the slideshow is done, see who guessed the company first (and maybe offer the winner a prize). Then discuss the following as a team…
What are some of the pitfalls of overthinking problems and solutions? You may want to list their answers on a whiteboard.
How can our team avoid some of these pitfalls?
What role does creativity play in solving problems?
In what ways can simple solutions have an unexpected impact on our team’s success?
Seeing the Big Picture
Encourage everyone to make a list of problems that your team can solve. Then challenge them to use their business acumen to think creatively about potential solutions that are simple and easy to implement. Or, if the problem requires a complex solution, challenge them to think of ways to make the process or solution less complex.
If you and your team have the book Seeing the Big Picture (Greenleaf, 2012) turn to page 2 and read the section: What Business Acumen Can Do For You