Vanity, Sanity, Reality. You’re Focusing on the Wrong Number.
Business owners are obsessed with the wrong number. They’re tracking the one that sounds good at parties or to their peers, not the ones that keep the lights on. They’re watching sales. They get really caught up in the profit and loss, and the reality is the answers to your business and its issues are actually on the balance sheets, which is actually way more critical than the P&L. We obviously want to have a profitable business, but the balance sheet is often the report that is looked at after the fact.
I’ve been talking about this for a long time, and recently in a team session, the accountant on our team summed up this thought process that I’ve had with three words: vanity, sanity, reality.
Vanity is your sales
Vanity is your sales. Essentially, when you hear people bragging about having an 11 million-dollar business, they’re generally talking about their sales line. This is generally how people describe how a business is going. When they speak about their business, they talk about revenue. It also is the number that generally means the least. While it definitely is important and it helps us show that we have a product or service that can be moved and has demand, it doesn’t tell us if they’re essentially a slow month away from missing payroll.
Sanity is your bottom line
Sanity is your bottom line. Sanity is the profit, what’s actually available after you paid for everything to make the sales happen. That’s the bottom line. This is the P&L. This is what actually allows you to go to sleep at night. It’s what allows you to settle inside of your chest and it feels like the work is worth it.
The only thing to be very cognizant of is that bigger isn’t always better. Profitable is better. A small business that profits is healthier than a big one that doesn’t every single time.
Reality is your balance sheet
Reality is your balance sheet. When you have strong sales and a profitable P&L, you can still be in trouble. That’s the reality. Reality lives on the balance sheet, and it answers the only question that actually matters: Do you have the cash to run this business? Profit is an idea, and cash is fact. You can earn a profit on paper while your bank account quietly empties. Customers haven’t paid, inventory is tying up cash, there’s a tax bill coming, and the loan payment is due before the next invoice clears.
Reality doesn’t care about your profit and loss. Reality is whether you can make payroll on Friday. Most businesses don’t fail because they aren’t profitable. They fail because they run out of cash at the wrong moment, and when you don’t even have the reports to support what it is that is happening in the business, you’re in even more trouble.
You need all three. Not one.
So here’s the thing: you need all three, not one.
- Vanity: Can you attract demand?
- Sanity: Does your model actually work?
- Reality: Can you survive long enough to keep doing it?
If your sales are strong but you have no profit, the model is broken. If your profit looks healthy but you have no working capital, a crisis is one bad month away. There are other ways the three can mismatch, and all of them are warning signs. This is the lens I run. This is how I think about business. I’m interested in what’s left over after sales and whether it’s sitting in the bank or in a form you can actually see.
As I like to say, “Wake up”. If someone asks you how your business is doing and the first number out of your mouth is sales, you’re not paying attention. Profit matters more. The balance sheet matters more than profit. If you can’t tell me your cash position off the top of your head right now, you’re flying blind. You don’t have time for that anymore. Open your books today. Pull the balance sheet (assuming it’s correct, but that’s another conversation). Check the working capital line. If it’s not where it needs to be, that’s the work for this week. It’s go time.