In this blog, I am going to show you:
How to go about running your business if you have made more money than expected this year
Why it is important to stay focused forward and keep building your financial wealth
In the last year, we have come across more and more businesses that have experienced a spike in demand for their products or services. As a result, they have made more money than anticipated.
The most recent comment I received was:
“Hi Bibi, 2020 was a record year for us and our crisis is we don’t know what to do with our cash.”
If this is similar to your case, keep reading…
Some industries saw a dip in demand and others a massive spike during the Pandemic. These extremes created headaches for CEOs, but we are all in agreement that it is better to be creating solutions for problems arising from more demand than from lack of it. Demand affects profitability and profitability affects cash flow.
In fact, if you want to fix your cash flow, first you need to fix your profitability. Hence the reason why profitability is a key source of cash flow.
Assuming you have now figured out how to get to profitability consistently, here are the key steps you should take when your business is generating more cash flow than anticipated:
#1 Analyse where profitability is coming from
Figure out the main sources of your cash flow. You want to grow by gravitating around the patterns of profitability in your business. These patterns could be around particular product lines, location(s) or customer profiles. Identify which profitable patterns can be repeated and replicate them.
One thing is for sure, you cannot build a business on patterns that are one-offs and cannot be replicated.
If you believe that the profitability pattern will exist regardless of the changes in market conditions, then you have a good case for building sustainable growth.
#2 Recognise your true cost
There is a tendency for owners, founders and CEOs to not recognise their true cost for the work they are doing. You pay yourself low wages and you top this up with dividends, so you can cover your living expenses. It is time to change this approach and start paying yourself the market rate. Dividends are your return for your investment in the businesses. They are not for covering your living expenses.
#3 Keep enough cash as your “Buffer” capital
It is really important to keep a certain amount of cash as your buffer. This buffer should equal 2 months’ worth of operating expenses plus your cost of direct labour. You should exclude all expenses you get terms on from this calculation.
During crises, it is enough to keep 3-6 months’ worth of operating expenses plus direct labour in cash, so you can manage spikes or a sudden dip in demand. Anything more than that will be holding onto too much cash, which you are better off using for other things in your business.
If you’ve got a line of credit, make sure you get rid of it. Keeping debt that is for the life of the asset you are financing, such as building or equipment is OK, but having a line of credit is like having addition, it does more harm to your business than does good.
#4 Accumulate for any other big expenditure
If you are planning on buying some equipment or a building, or want to acquire another business it is good for you to start accumulating capital for this. If not, then go to step 5.
#5 Tend to your personal finances
Once you have accumulated enough buffer capital, paid off the line of credit, etc., you can start taking the excess cash to build your personal finances.
First, pay off your debt, your mortgage, and anything you owe money for.
Next, build your emergency fund of 6 months living expenses and once you accomplish this go to step 6.
#6 Build your personal financial assets
Founders and entrepreneurs often have a target between 1m – 5m for their financial assets, outside of their business. You can start moving towards this financial target and when you have accomplished it, it's time to consider your next “venture”.
This venture is not in the form of a “series” of businesses, but rather a “portfolio” of businesses. When you build a portfolio of businesses you can use the same executive team across these businesses. Most executives are underutilised, so when you involve them in multiple businesses you are giving them the opportunity to add value to both, you and their career.
#7 Manage your portfolio
Your businesses require your focus and attention to keep working successfully. If you choose to be involved in the day-to-day running of the businesses, and you are drawing a salary, earn it! If you choose to be an investor with the hired management team, be the Chairman of the Board.
You might be approached to sell one of your businesses. And we get it, it is flattering and the thought of releasing the value of your business in one go feels satisfying. But running a good, well-capitalised business has rewards that are far more satisfying than the financial reward. Most entrepreneurs sell their best business creation and they never find anything else after that that is as good. Consider that having a great business to be involved with has value beyond money. Weigh the options to sell before taking an action.
Please share, tweet or recommend to those you feel might find this of interest.