A brand that I admire suddenly closed its doors last week. From the outside, it looked like an enviable business - millions in revenue, a growing customer base and thousands of five-star reviews.

They went out of business because of cash flow - the common killer among product-based companies. Steve Jobs said that victory in business is spelled survival. The only way to survive is positive cash flow.

Imagine that your business has two buckets and money is water. One bucket is in perfect condition and the other has holes in it. The perfect bucket is your profit bucket and the bucket with holes is your operational bucket. The revenue pouring in and draining out of the operational bucket is your cash flow.

All your revenue goes into your operational bucket first and those holes are your expenses. You get to pour what’s left in the operational bucket into your profit bucket every month, maybe every quarter or sometimes only once per year. The more holes your operational bucket has, the less you’ll have to pour into the profit bucket.

A business with strong positive cash flow will pour more into an operational bucket with fewer holes. Break-even or negative cash flow businesses are full of holes and they lose as much, or more, than they pour in every month.

But how does a negative cash flow business lose more than they pour in? Good question. They have to pour what they were holding in their profit bucket back into the operational bucket to keep the business going.

Sometimes the profit bucket is empty so they need an additional source of money to pour into their operational bucket. That’s where debt comes in. It can be short-term debt - a line of credit to get through a lean part of the year. Or it can be long-term debt - continuously pouring into the operational bucket.

Regardless of the type of debt, it means your operational bucket now has a new hole in it. The larger the debt the larger the hole. The larger the hole the less that goes into the profit bucket.

If the goal is to have something in the profit bucket the strategy should be to minimize the holes in the operational bucket and pour what you can in the profit bucket as often as possible. This is a simplified analogy for cash flow.

Focusing on cash flow is critical because it ensures that more is going into the operational bucket than is coming out. As the revenue fills the operational bucket more is poured into the profit bucket every month. 

Expenses are holes in the bucket. A bigger warehouse is a bigger hole. A new staff member is another hole. That’s not a problem if these expenses contribute to more revenue being poured into the bucket every month. 

If survival is the key to a successful business then minimizing the holes in our bucket should be the priority.