Almost every founder I know has learned this lesson the hard way:

Revenue growth doesn’t guarantee a great business.

Revenue growth is essential to a great business.

But it’s not the only factor.

If you’re a founder who:

• hired too many people

• realized that a line of business or customer segment wasn’t profitable

• had expenses balloon without realizing it

• missed a sales target and had to do layoffs

You know the pain of having revenue growth with the underlying business being in a bad spot.

Here’s the thing:

It’s not just you.

I know 100s, maybe 1000s of stories like this.

Including from founders who have gone on to become millionaires and even billionaires!

It is an extremely painful but wildly common lesson. It’s learned the hard way, but you only need to learn it once!

Why It Happens

It usually involves most or all of these factors!

• You’re growing quickly.

• You’re focused on sales and customers.

• There’s a million fires to put out daily.

• It can be hard to get a clear financial picture because expenses, cash flow, and revenue vary from month to month.

• You don’t know yet what metrics (and leading indicators) matter most to your business.

• Competitors are scaling quickly (or so it seems).

• Revenue is growing so of course everything is okay!

P.S. This can happen with personal finances too! Anyone ever overspend at their first job or pay raise before realizing you can’t actually afford a fancy new car or dinner out every night on an entry level salary even though it IS more money than you’ve ever seen in your life?!?

What To Do

If this is hitting a little close to home, here’s the action plan:

Get to a good place as quick as possible.

What does “a good place” mean?

It can vary depending on the business and situation but usually involves some mix of:

• Get clear and honest about the financial reality (margin, cash flow, runway)

• Make the cuts needed (people or expenses)

• Get to breakeven, profitability, or extend runway

• Pivot or end-of-life a product that’s not working

• Fire a bad customer (said politely: wind down a customer engagement that doesn’t serve the business)

I know multiple founders who have looked into the abyss, made the hard decisions, and their businesses went on to thrive.

I also know founders who realized their business had a mortal wound, closed things down in an honest way, and started again with something wildly successful.

In both scenarios, the scar tissue sticks with you. It doesn’t feel good but it makes you a better entrepreneur long term!

How To Prevent It

If you’re one of the rare founders who hasn’t experienced this first hand or you’re just getting started, here’s what to remember:

1. Look Beyond Revenue

Most founders I know have an eagle eye on revenue. They can tell you their current ARR, # of customers, and the size of the last deal that came in.

They may even check their bank account balances regularly.

The key is to go deeper.

• What is your sales pipeline like?

• How many months of runway do you have?

• What is your cost of customer acquisition (CAC) or life time value of a customer (LTV)?

• Does your hiring plan align with revenue (and cash flow)?

These “second layer” metrics can often reveal business weaknesses or financial issues on the horizon.

2. Stay Close To The Numbers

Founders are busy. Overloaded and overwhelmed. So is your scrappy startup team.

What’s more important — closing a new deal or logging expenses in Quickbooks?

Would you rather dedicate resources to customers or back office? Customers, of course!

A few months of frenetic customer activity and you realize you haven’t looked at financial data in weeks. Gulp.

Or maybe someone sent you a summary but you didn’t have a chance to really dig in and ask questions.

This is one reason why companies have quarterly board meetings and send weekly or monthly updates — accountability.

It’s a forcing function to organize, review, understand, and analyze the financial and business data.

If you don’t have investors or advisors, figure out other ways to build in checkpoints for yourself:

• Non-negotiable calendar block

• Hire a part-time bookkeeper, meet regularly

• Create a CEO peer group for financial accountability and learning

• Bring on a fractional CFO

When you stay close to the numbers, you get ahead of financial issues and better understand the nuances of your business.

What is a key metric for your business (beyond revenue) that gives a clear picture of business health? What strategies do you use to stay close to the numbers? Have you ever had to “reset” a business? What did you learn from it?

P.S. Would you be interested in another post where I go into detail on “secondary metrics” and other strategies to monitor business health? Reply or comment to let me know!