Financial success in business can transform your life and the life of everyone who is counting on you financially. But there’s no magic wand you can wave that will instantly create financial success.
Winning financially in business is a journey.
It’s about deciding what you are trying to create financially then creating a roadmap to get there safely and on time.
The problem today is too many entrepreneurs are feeling more like passengers than drivers in their business. Oftentimes their company is careening along on the highway of business as they wonder and worry about where their business might end up financially. But that’s not wise—nor fun.
What you need is a sensible plan—a roadmap—to guide you on your path to building a strong, wealth generating business. Here is an achievable, 10-step process to walk you through how to make your business strong financially—you can begin implementing today. I guarantee that you will be surprised and delighted at the speed with which you see and feel the benefits.
Step 1: Build your cash balance to one month of expenses.
Your bank balance is a lot like the gas tank in your car. Consistently running it to close too empty creates stress and unnecessary hassles. You have to constantly consider if you have enough gas to get to where you are going. Same with your bank balance. Maintaining a very small bank balance in business turns otherwise simple decisions and processes into complicated and time consuming hassles. If you have less than one month of operating expenses in the bank, you are likely experiencing unnecessary stress, angering your vendors, irritating your employees, ignoring the financial reality of your business, and generally making your life harder than it needs to be.
Step 2: Put aside enough cash to pay your income taxes.
You need to set aside enough cash to pay your income taxes. If your business is a tax paying entity (as opposed to an LLC, S Corporation, partnership, etc.) make your estimated tax payments religiously and consistently. If you have a pass-through entity, then you should set the cash aside and distribute enough cash to shareholders for them to make their estimated tax payments. Taxes should be taken care of first. The government yields way too big a stick to make a mistake when it comes to paying your income taxes.
Step 3: Diagnose your profitability and cash flow weaknesses (then fix them).
This step is about defining the gap between your current level of profitability and what it could, or should, be. Then setting a dollar amount that represents your profitability improvement target (the gap between where you are and where you should be). Next you “peel the profitability onion” in order to identify the three to five specific areas of your business that need to change. Then create a plan to make the change happen. Your number one driver of financial performance (and cash flow) is profitability. Make sure your business is firing on all cylinders when it comes to profitability.
Step 4: Create a reliable financial forecast for the next 6 to 18 months.
One of the most powerful tools in business is a reliable financial forecast. It provides the view through the financial windshield of your business. It helps you define where your business is going financially. It shines a light on the dangers and opportunities that lie ahead of you on your journey to a bigger and brighter financial future. In my experience, it is impossible to run a business intelligently without a clear view through your financial windshield. A reliable financial forecast produces results surprisingly fast.
CREATE A SAFETY NET
Step 5: Pay your bank line down to zero (even if temporary).
A revolving line of credit is meant to, well, revolve. You borrow on the line in order to meet seasonal demands or address other short-term cash needs. Then the bank line should be paid back down to zero. The discipline of forcing yourself to pay off your line at least once a year (or more) will help ensure you are using the bank line the way it was intended.
Step 6: Reduce your personal guarantees (begin the process).
In the early days of building a business it can be difficult to avoid personal guarantees. But as you grow and become more successful, you have more leverage, and more reason, to purposefully begin reducing your personal guarantees. You can begin this process by making a list of your existing personal guarantees. List the lenders, suppliers and others down the left side. Then put the approximate dollar amount being guaranteed next to each one. You will be surprised how long the list is—and how big the guarantee amounts are. Next step is to stop signing new personal guarantees and develop a strategy to reduce the number of existing guarantees.
Step 7: Build your cash balance to three months of operating expenses.
Building your bank balance to three months of operating expenses creates a cash cushion against surprises. And it provides “dry powder” so you can quickly jump on unique business opportunities that might come your way. Not to mention the fact that there’s nothing like a healthy cash balance to help you sleep well at night.
GROW AND ENJOY
Step 8: Use existing cash flow for capital expenditures and growth capital.
Capital expenditures generally take two forms. The first is “maintenance capital expenditures”. These are expenditures, or investments, that maintain your existing fixed asset base. Generally speaking, they help prevent decline. The second is growth-related capital expenditures. These are meant to add new income producing assets. They are designed to add to your ability to serve more customers, drive revenues higher, and increase profitability and cash flow. You are wise to fund both with internally generated cash as you grow and become stronger financially.
Step 9: Pay down your remaining debt on an accelerated schedule.
Debt can be an important tool in helping you build your business. But with financial success comes the ability to pay your debt down on an accelerated schedule. Use a portion of your existing cash flow and allocate it to a more aggressive payment plan. It will feel weird at first. But you will come to love the feeling of strength and accomplishment watching your debt shrink.
Step 10: Reward the owners of the business with cash.
The ultimate financial reward for a business owner is receiving healthy distributions of the company’s excess cash. It’s your reward as an investor. It’s your reward for building a successful company. It’s cash you can invest in other assets or ventures as part of building a sizeable net worth for you and your family. It’s a fantastic way to enjoy the fruits of financial success.
In my following posts, I will go into more detail about how to implement each step. I’ll show you that the roadmap I have set out for you is an achievable plan t for how to make your business strong financially with good cash management and business practices.
Start slow. No need to speed through the 10-step process.
Start by implementing step 1. Building a wealth generating business is fun. And today is the ideal time to get started.