Why early-stage companies should optimize for cash before margins
I can’t tell you how many times I’ve worked with early-stage operators who are making decisions based on “profit,” “getting the best price,” or “maximizing revenue”—without realizing those choices are quietly working against them.
Each time, I end up redirecting the conversation to one thing: cash.
Sometimes, cash and profit align.
Often, they don’t.
And consistently making decisions that optimize for profitability instead of cash is one of the fastest ways early-stage companies get into trouble.
This post is about building the right instinct at the right stage. Specifically, it will help you understand:
- Why cash—not profitability—is usually the right decision-making lens for early-stage companies
- How to talk about profit (and leaving profit on the table) in a way that builds confidence with your board and investors
- When it actually makes sense to shift from cash-first decisions to profit optimization—and what needs to be true before you do
This gap between profit and cash usually doesn’t show up in theory.
It shows up in everyday operating decisions.
Here are two common examples where optimizing for profit looks right on paper—but prioritizing cash is the better early-stage call.
Example: Inventory Purchases and the Illusion of Better Margins
Let’s say you’re launching a new, all-organic makeup line and need to purchase packaging.
Your supplier offers two options:
- 50,000 units at $0.50 per unit
→ $25,000 cash outlay - 150,000 units at $0.25 per unit
→ $37,500 cash outlay
Your forecast suggests you’ll sell 100,000–150,000 units over the next 3–6 months. You hope to reach the high end of that range—but demand isn’t yet proven.
From a profit margin perspective, the larger order looks attractive. Your cost per unit is cut in half.
From a cash perspective, it’s a very different story.
If you’re prioritizing cash, you buy in 50,000-unit increments until demand is clear.
If you’re prioritizing margins, you commit $37,500 upfront and hope the forecast holds.
Early-stage companies should almost always choose the first option.
Why 50,000 Units Is the Better Decision
First, it dramatically reduces risk.
With the smaller order, you’re tying up $25,000 in cash. With the larger order, you’re committing $37,500—regardless of whether demand materializes. Excess inventory doesn’t just sit on your balance sheet; it quietly drains flexibility.
Leaving some demand on the table is far less dangerous than sitting on inventory you can’t move.
Second, it preserves optionality.
Smaller purchases allow you to adjust as reality unfolds—pricing, demand, marketing, even packaging itself. Cash buys time. Inventory locks you in.
Third, it tells a stronger story to your board.
- We intentionally de-risked our forecast
- We prioritized cash and flexibility early
- We now have real demand signals and pre-orders
- We have a clear path to improving unit margins as volume becomes predictable
That’s not unsophisticated thinking. That’s disciplined execution.
The goal at this stage isn’t to look maximally profitable on paper.
It’s to survive long enough—and with enough flexibility—to earn those margins later.
Example: A B2B SaaS Prepay Decision
Imagine a B2B SaaS company selling $60k annual contracts.
A new customer wants to sign—but they have two options on the table:
Option A: Annual prepay
- $60k paid upfront
- 10% discount → $54k cash today
- Lower reported ARR and margins on paper
Option B: Monthly billing
- $5k per month
- Full $60k recognized over the year
- Higher headline ARR and “cleaner” unit economics
- Cash trickles in slowly
From a profitability lens, Option B looks better:
- Higher total revenue
- No discount
- Better reported margins
But from a cash lens, Option A may be the better decision—especially for an early-stage company.
That $54k upfront could:
- Extend runway
- Fund a critical hire
- Buy time to hit the next milestone
1. Why cash—not profitability—is usually the right decision-making lens for early-stage companies
In both examples, the “more profitable” option required committing more cash before reality was fully known.
In the inventory example, higher margins came from buying more product than near-term demand justified. In the SaaS example, higher reported revenue came from slower cash collection.
In both cases, profitability looked better on paper—but risk increased.
Early-stage companies don’t fail because their margins are below industry average.
They fail because they run out of cash before they’ve had enough time to test, learn, and refine what actually works.
2. How to talk about profit (and leaving profit on the table) in a way that builds confidence with your board and investors
Both examples highlight an important truth: leaving profit on the table is only a problem if you can’t clearly explain why you did it.
Boards don’t lose confidence because you accepted lower margins or offered a discount. In fact, they gain confidence when those decisions are intentional and well communicated.
In these situations, strong communication sounds like:
- “We intentionally purchased smaller inventory batches to de-risk demand.”
- “We accepted a prepay discount to strengthen cash flow and extend runway.”
- “There’s a clear, credible path to improving margins once volume and predictability are established.”
When you frame profit tradeoffs as intentional sequencing—not missed opportunities—you signal control and a deep understanding of your business.
3. When it actually makes sense to shift from cash-first decisions to profit optimization
Neither example argues against profitability. They argue against premature optimization.
So when does it make sense to shift from cash-first decisions to profit optimization?
Two things usually need to be true.
First, cash flow risk is materially reduced.
That can happen in a few ways. In some companies, it shows up as consistent—or near—cash-flow profitability. In others, it’s because external capital is no longer painfully expensive.
In both cases, the common thread is the same: the business no longer lives and dies by every cash decision.
Second, board conversations have shifted from how you’ll eventually become profitable to proving that profitability is repeatable and scalable.
That doesn’t mean you ignore margins until then. Once forecasts are reliable, improving pricing or buying larger inventory lots can still be cash-positive decisions.
The point is sequencing. Until cash flow risk is meaningfully lower, cash should remain the primary priority. Profitability follows. And even then, strong companies never stop paying close attention to cash.
The Real Goal: Time and Optionality
You’re already taking plenty of risk by building a startup. That’s the job.
The goal isn’t to eliminate risk—it’s to avoid unnecessary risk.
Prioritizing cash is one of the simplest ways to do that. It gives you more attempts, more feedback loops, and more time to adjust when reality doesn’t match the plan.
Early-stage companies don’t win by making one perfectly optimized bet.
They win by making many small, reversible decisions—and learning quickly from each one.
Profitability comes later.
Cash buys you the chance to get there.
If you’re unsure whether you’re optimizing for the right thing right now, that’s often the best time to have a conversation.