success image

Key Factors to Measure the Success of a Business?"

A reporter asked: "What are the key factors to measure the success of a business? Profit? Marketing? Number of employees?"

Our reply:

I would assume the business in question is a profit-seeking entity.  In my opinion, the key factor to measure the success of a business is “cash flow.”  On the contrary, profit is an accounting item at the bottom of an income statement after adding up all the revenues and expenses.   Marketing is the strategy to get the product or service exposed to the target audience.  The number of employees, for sure, is a big “NO”.  Maybe the quality of employees matters more than the quantity.

dollar bill

If you recall the technology bubble burst in the early 2000’s, there were at least a number of search engines, InfoSeek, Lycos, Excite, Yahoo, just to name a few.  Except, Yahoo, which I am not sure what it is doing now, they all went out of business.  Why?  Bad product?  Bad marketing?  Not enough employees?  Noop.  Maybe, bad marketing had a part; can't argue with that. However, they all had one thing in common: they went out of cash to burn. 


A more recent example, the financial crisis which brought down a slew of once successful businesses including the names like Lehman Brothers, AIG, Bear Stearns.  Why?  The A.B.S.?  The derivatives are the cause.  The root is that they simply did not have enough assets, mostly liquid assets such as cash, to cover their liabilities, the derivatives.


The reason that profit is not a key measure of the success of a business is that time and time again a company can generate healthy revenue and profitability.  But, guess what, it went out of business because those revenues and profits did not convert to cash quick enough to meet its obligation.  In the other words, profits do not translate to cash which is the currency businesses use to pay their employees, suppliers, lenders, etc. 


The number of employees is definitely not a key measure of business success.  On the top of my head, I can already think of a few companies that had gone through expansion by hiring aggressively, especially in the tech industry in recent years.  Now, they are on a hiring freeze or downsizing.


I would recommend taking a look at this blog post titled: “What to Look For in a Company’s Financial Statement?” might provide a some insight.