A couple of interesting case studies have recently highlighted the importance of financials to a business, and the ultimate measure of the success of an enterprise.

 

Theranos

 

A few years ago, Theranos, the brainchild of Elizabeth Holmes, burst on the scene. Theranos had pioneered a new way of testing blood, by using a pinprick instead of a vial. Results would be available almost immediately, and the cost would be greatly reduced. Ms Holmes was touted as “the next Steve Jobs”, sharing his affinity for black turtlenecks. She was celebrated as the world’s youngest self made female billionaire, and a shatterer of Silicon Valley’s glass ceiling. She raised more than $700 million from investors, and, at its height, Theranos boasted a valuation of around $9 billion. Investors were happy to be told that revenue in 2014 was $108m.

 

And then the truth came out. The capabilities of Theranos were highly exaggerated. Of the 200 tests that had been carried out, supposedly using their technology, Theranos had performed only about 12. They had also lied about their clientele, telling investors that the technology had been used by the military on the battlefield, when it had only been used in studies, and that it was poised to be rolled out by a grocery chain, when the deal had already collapsed.

 

And the financials had also been concocted – the revenue of $108m was, in actual fact, only $100,000.

 

Investors have taken a bath, because they believed the story, without doing their homework. They didn’t do their due diligence, and didn’t receive regular financial reports. They wanted to believe, and they lost their money.

 

Many small business owners don’t do their financial homework. They want to believe that the business is doing well – and suffer the consequences when the chickens come home to roost.

 

Knowing the full financial facts of your business is imperative. Don’t ever trust your gut feel in finance. It may not be reliable.

 

Football Club Barcelona

 

The FC Barcelona is an institution. It is one of the richest and most beloved professional sports franchise anywhere in the world. It is a unique club, with more than 100 million Facebook followers, and millions more on Twitter. It is the home of Lionel Messi, and it is aiming to earn 1 billion euros this year.

 

FC Barcelona is a tradition. It is owned by its 143,855 members. Its board of directors is unpaid, and each member traces their Catalan roots back many generations. They are celebrities in the region. As membership has long been closed, only children and grandchildren of members can become members – and they are signed up at birth, and can wait more than 20 years for a seat. Membership is cheap – only 180 euros per year – and all seats have been assigned to members. So there is no chance of raising more money by selling seats.

 

Suggestions that the model be changed to make it more profitable are met with horror. It is the members’ club.

 

But things need to change. It is essential that the club keep it’s top players in order to remain popular. The star players earn huge salaries – Messi is reported to earn 100 million euros per year. It cost the club 105 million euros to buy a top player from German club, Dortmund; and 160 million to buy a player from Liverpool. The money involved is just astronomical.

 

So what’s it all about? In order to remain at the top, it’s all about the money FC Barcelona has at its disposal. So principles change. It is, for the first time, allowing sponsors’ logos to appear on its jerseys, and it is considering selling naming rights on its stadium. It is also looking at ways to monetize its supporter base, to increase the worth of each fan from the current $2 per year

 

FC Barcelona is an institution, and is a cherished brand with much tradition. But, at the end of the day, even for a club as successful and popular as it is, it’s all about the money.

 

Without a good cash flow, it can’t pay the salaries needed to keep its best players. Without a good cash flow, it can’t afford to buy new players. Without a good cash flow, FC Barcelona could slide into mediocrity – which would be worse than death.

 

Every business needs a good cash flow. No matter how big or small the enterprise, cash is king.

 

 

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This blog is brought to you by Lex Tannenbaum