Running a business and generating cash is tough. I am often asked, “what should business owners invest in” once they have made it out of the Struggling Quadrant. The most popular leading answer I receive is real estate, real estate and real estate. There is a common belief amongst business owners suggesting that owning the real estate their business operates out of is an excellent investment and use of their cash flow. In this blog entry, I will provide a different perspective that I believe provides a better return on cash compared to owning real estate. In my experience, I have learned the hard way that the best investment returns result from unlocking value in my business.
An introduction to the Cash Flow Quadrant For Business Owners
What quadrant is your business in?
Years ago, when I spent most of my time working with entrepreneurs to help them secure financing so they could turn their companies around, I needed a quick way to understand their financial and operational status. Every entrepreneur (including myself) views their business through a subjective filter that influences what they focus on and the results they achieve. As someone who works with entrepreneurs to change outcomes, I developed a cash flow quadrant for business owners that removes subjectivity and provides clear direction for where an entrepreneur needs to focus.
Cash in this context does not include loans, investments or financing advances. Net profit is the money left over after expenses are subtracted from sales.
No cash and negative net profit
A business that has no cash and negative net profit is a business that is struggling to survive. A company in this position needs to focus on determining the viability of surviving. Once in this position, an owner has to decide to close the business or seek the necessary capital to help the business return to profitability.
A business that has cash in the bank but has negative net profit is a business that is adjusting to its circumstances. A company in this position needs to focus on generating profits, requiring changing the business model, products, services, or people. If an owner cannot do this, their company will eventually struggle and become unviable. Conversely, an owner that can make the adjustments needed will find itself on a growth path.
A business that has no cash but has positive net profit is a business that is growing and is reinvesting all of its money into expenses that can help it increase its income. A company in this position needs to focus on managing its income and expenses to ensure the company has enough cash to meet its objectives. If managed well, an owner will find themselves in the inevitable position of being able to make strategic investments that can exponentially increase their cash. If an owner cannot manage the income and expenses associated with growing, they will find themselves having to make adjustments to ensure the survival of their business.
Cash Flow Quadrant For Business Owners
Cash in the bank and positive net profit
One of the many reasons owners build a business is to produce financial security through stable cash flow and a return on cash invested. A business that has money in the bank and is generating positive net profit is a business that can provide an owner with the resources they need to make the investments they want.
Cash Flow Quadrant For Business Owners
The opportunity to start, run and grow a business is a meaningful and worthwhile endeavour. Profit is an intangible feedback loop that tells you how well your company uses its resources. Cash is a tangible feedback loop that tells you what resources your business has access to. When managed well, a business owner can achieve the unachievable.
The cash flow quadrant for business owners is a guide to understanding what a business doing with its cash flow.
Check out these other resources:
About me
I own a few businesses and am always looking to help a business owner with theirs.
I know firsthand how important it is to manage cash so let’s connect if you have common cash flow questions – I’d be happy to help.
The share price for Netflix has dropped significantly over the past week as the market tries to figure out what they think the future of the business will be. Netflix has lost more than 200,000 subscribers and believes they stand to lose more over the coming months. The company has focused on delivering high-quality content to its users and, for several years, enjoyed a first-mover advantage in what has become a very competitive and saturated streaming service marketplace. Netflix may no longer enjoy being the market leader and will have to focus on defending its position while it develops new growth strategies.
How will inflation force you to change your business? Inflation is a funny thing. You can’t pinpoint the exact day it impacted your business. You can only look back and notice the changes it made. As an entrepreneur there are two paths you can choose: 1) let inflation happen and watch your business slowly fade, or 2) get out in front of inflation and watch your business take market share from businesses that follow the first path. Whether you understand inflation or not, every business is faced with the decision to be proactive or reactive. Cash flow is the single largest reason businesses fail and inflation can accelerate cash flow challenges if not managed properly.
Are you stressed or scared about your business finances? Business finances are a consistent point of stress for entrepreneurs. Sleepless nights. Panic attacks. Ignoring voicemails and emails. Fear produces action and there are only two: failure or profit. There is nothing in between. As an entrepreneur, you have the choice of taking actions that can produce either result.
In their own mind, every entrepreneur thinks that their business is a slam-dunk opportunity for a banker or investor to consider. What an entrepreneur often fails to realize is that a banker or an investor is not as close to their business as they are. They lack the intimate knowledge of all the small details and are often left having to make a decision based on out-of-date information including financial statements that don’t make sense which is the basis of every credit decision a bank or investor makes. If entrepreneurs are serious about being approved for financing, they have to approach their request the same way they approach the delivery of their product or service to the market: with specific solutions to the problems presented. Imagine trying to sell your product or service to customers with half-baked strategies and materials.
Have you ever asked yourself this question? When you consider the work required to keep a business alive, trying to figure out how to grow a business can seem impossible and pointless. Why bother growing a business when it’s hard enough to keep it going without complications and challenges? When it comes to growth, what are we really talking about? Growing revenue? Growing experience and knowledge? Growing our bottom line or the value of our assets?
It doesn’t always need to be complicated. It doesn’t always need to be difficult. Sometimes the simplest goals are the ones that don’t require a lot of thinking. As entrepreneurs we strive to build value by using people and resources to solve a problem in the market. To get a return on the effort and money invested, we need strategies that can help us achieve that. While simple in principle, the practise of doubling your results takes grit and is just challenging enough that you need to pay attention and stay engaged. Once done, the rewards set the stage for the next goal.
There are moments when everything is going well. Money is in the bank. Profit is finding its way to the bottom line. Customers and staff are happy. These moments can cause complacency if we aren’t careful and it’s only a matter of time until life feels upside down. When the good moments come along, they are best used to figure out what a business needs to do next. If you need some direction on what to do next, take a look at your competition.
Not every day is awesome. Depending on where you are in your journey as an entrepreneur you might find that most days are tougher than others. Cash flow concerns. Challenges with people on your team. Market problems that you didn’t anticipate would impact your business. The list is endless. There are days when it can be very overwhelming to be an entrepreneur and it can feel like everything is coming undone. In moments like these, perspective helps.
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