The degree to which you create true wealth in your business eventually comes down to how much cash you have and your ability to convert your business assets into cash over time. It's really that simple.
If you look at your business from the 20,000-foot level, you'll see that there basically are two ways your business should produce cash for you.
- Your business should create excess each month, quarter, and year.
- You should be able to generate cash when you sell your business.
Sounds simple, right? Well, how you manage the business each day, and where you decide to place your focus, can have a dramatic affect on how much cash you eventually create for yourself and your family.
Let me show you what I mean.
Creating excess cash
You have to create enough cash every month to get the bills paid, service debt if you have any, take care of you and your family, have the cash to grow and expand the business, have the cash to make improvements to the store over time, etc.
And you also want to be able to generate a return on your investment. You have money at risk and deserve to earn a return on that investment. That means the business needs to generate cash over and above all the current and future needs of the business.
Doing that requires a keen focus on doing everything in your power to cause the business to produce excess cash. It means relentlessly working to grow revenue, reduce expenses, ensure receivables are being collected, reduce inventories, and a whole host of related actions.
Selling the business
The second way your business should create cash for you is when it comes time to sell the business. You've made an investment in the business, and when you sell you, you want to reap the rewards of all of your hard work.
The sale will be for cash, notes, or both. At the end of the day, you want to have enough cash from the sale so that together with your other assets, it helps you live the lifestyle you've chosen for yourself and your family.
How is this accomplished? Generally speaking, most businesses are sold based on their ability to generate cash for their owners. They are usually priced at a multiple of the net cash they generate.
What this means is that it's extremely important that you put your focus and attention on creating cash at the highest levels possible each year. Not only are you increasing your annual return on your investment, you are also making the business worth more money when it is sold.
And you're increasing it by a multiple of cash flow. That means every additional $10,000 the business generates each year, means $40,000 to $60,000 or more at the time of sale. An additional $20,000 each year means an additional $80,000 to $120,000 or more at the time of sale.
Realizing your cash goals
Whether its reaping current benefits or future, if you want to really maximize the amount of cash you generate from your business, don't mistake the profit or loss number you see on your income statement as cash flow. It is one of several components of your cash flow that will influence your current and future gains from your business.
Accounts receivable, inventory, capital expenditures, and debt service have a huge impact on the amount of cash you have available to achieve your financial goals. Don't make the mistake of focusing so much on the income statement that these important components of your cash flow are neglected. Your financial security and independence are counting on it.