On this episode Josh discusses what he considers an essential topic, “Cracking the Cash Flow Code” and talks about the 5 stages of your business.
Josh Patrick is the founder of Stage 2 Planning Partners and The Sustainable Business. He is also the author of Sustainable, a fable about creating a personally, and economically sustainable business, and most recently he is the creator of Cracking the Casual Code and the Financial Freedom Project.
Josh’s main focus in life is helping private business owners create extraordinary value with their businesses and lives. He helps create great outcomes using life experiences he has had during his almost forty years of running and being around his favorite people – private business owners. He is a student, an entrepreneur and a curious observer of life.
In today’s episode you’ll learn:
- What is Cracking the Cash Flow Code?
- What the four areas of profit is?
- What is the success path to having enough cash to cover everything in your business?
- What are five stages of business that you have in Cracking The Cash Flow Code?
- What you can do to move from that stage that you’re into the next stage that you’ll find yourself in?
Josh Patrick: Hey, this is Josh Patrick. You’re at the Sustainable Business podcast.
Today, we’re going to do a thing a little bit differently than I normally do. Today, it’s going to be a solocast which means it’s only me speaking with you today but – and this is a big but, this is a really important topic that I want to spend some time diving down with you. Frankly, it’s something I’ve spent a zillion hours thinking about and working on. With most of my clients, this is the thing that we focus on. I call it Cracking the Cash Flow Code.
Now, what is Cracking the Cash Flow Code? Very simply, all it is, is that means you have enough cash to cover everything in your business. Today, we’re going to be talking about – first, I’m going to start off with what the four areas of profit is which is the reason that you need to crack the cash flow code and have enough cash to fill these four buckets. The next thing we’re going to talk about is the success path that it takes for people to get to where they’re fully funding all four areas of profit and making their business become a sustainable business and not just a successful business. We’re going to look at each of the typical roadblocks along the way.
Finally, we’re going to be talking about, as we go through each step, what you can do to move from that stage that you’re in to the next stage that you’ll find yourself in. Now, as I’m going through these stages of the cash flow in cracking the cash flow code, what I want you to be doing, I want you to be thinking about “What is it and where am I on this path along the way?” Now, some of you might be at stage 5, some of you might be at stage 1. But the truth is most of you are going to be in stage 2, 3 or 4.
Let’s get started and move right in. First, I want to talk with you a bit about what the four areas of profit are. Now, the four areas of profit are, number one, having a great lifestyle. Now, that means having enough money to fund all the things that you need to do in your personal life, for you to live a life that’s something you’re happy with.
Now, there are too many business owners I know who delay, delay, delay. They get to the end of the road and they haven’t put enough money into making their life great and they’re not very happy. I don’t want you to be that person.
The second thing you need to do, a bucket you need to fill, is to have enough money for an emergency fund. Now, a lot of times, people will put this at the last bucket but I put it in number two. The reason is the main reason that people’s businesses stop existing is they run out of cash. Now, I don’t want you to be one of those people so you need to have put some money away to fund three to six months – I actually like a year’s worth of cash in your emergency fund because here’s what happens, along the way you’re going to find that we have a recession that negatively impacts your cash or you’re going to have a really big client that decides they’re going to stop doing business with you. If that happens and you don’t have emergency funds put away, you might not have enough cash to get you through to the next stage.
The third thing is a fully-funded growth program. Now, I used to say, “A fully-funded marketing program” but the truth is growth costs money in lots of ways besides having enough money to and sales appropriately. You need to have money for accounts receivable, if you have accounts receivable. You need to have money to fund inventory, if you have inventory, because as you grow, you’re going to need more inventory. If you’re a capital-intensive business, you need to have enough money or have access to lending that will give you enough money to buy the capital equipment you need. And then, finally, there is that full marketing program. We’re going to talk about what I mean by a fully-funded marketing program as we go through today’s program.
Finally, you need to have a fully-funded retirement plan. Now, I know you might be thinking that you’re going to grow your business. It’s going to become a big business. It’s going to become valuable enough where someone’s going to come along and buy it and the money that you’re going to get is going to give you all the money that you need to retire in a manner you want. Well, I hate to give you some bad news. That’s probably not going to happen. The truth is most people who build businesses, build businesses that – if they’re saleable, are not even close to being saleable enough to provide all the money they need for retirement.
So, if you ever want to stop working, you’re going to need to pay attention to what’s called qualified retirement plans. You might know there is a simple plan, or a 401k plan, a profit-sharing plan. Or, if you’re really sophisticated around retirement planning, you might know about cash balance plans which is the magic bullet in creating enough cash for you to be able to retire easily.
Now, I call this pre-funding your retirement. It’s something I want you to pay attention to. As we’re going through today’s program, I want you to be thinking about these four areas of profit and asking yourself the following question, “Am I putting enough money away to fully fund these retirement areas?”
Now, let’s move into what I call the success path of Cracking the Cash Flow Code. There’s five stages that you can go through. Typically, what happens is people, who start businesses, start at stage 1. If they create a sustainable business, they end up at stage 2. Let’s go through the five steps quickly. Number one is “I have no cash.” That’s the very beginning of your business or it’s a time in your business where you’ve had a really negative downturn and you’re running out of cash. That’s where you need to have your emergency fund.
Now, if you’re starting your business and you’re at the place where “I have no cash”, you know that you have to have other places that you can tap into cash to pay for your living expenses while you start your business. It’s the very beginning of the business. We’re going to get into some detail about that.
Stage 2 is “Cash comes and goes”. I call this the hills and valleys. You either have cash or you have no cash. The reason you have cash is because you’ve been selling, selling, and selling. You’ve got a lot of business to do and accounts receivables are coming in. People are paying you for your business. But the problem is you’re probably oversold and you have no time to continue marketing and selling which means that, at some point, you’re going to have done all that work, you’re going to run out of cash, and you’re at that valley and you’re going to have to go out and sell, sell, sell again. Now, there’s ways of solving that problem. We’ll go into that also.
Stage 3 is what we call “Pay days happen every week.” This is where you’re getting money on a consistent basis for your business and you’re able to pay yourself a reasonable salary but the other three areas of cash needs – meaning the emergency fund, your retirement plan, and fully-funded marketing, your growth plan is not there.
Stage 4 is you’re what I say, “Well, you’re 50% of the way there”. You’re funding three out of four of the things that you need for profit – the areas of profit but you’re not fully funding all of them except for lifestyle and the other three areas need work.
Then, finally, you’ve reached creating excess cash which means all four areas of profit are fully funded and you have a great lifestyle. You have a great business. You love the way you’re spending time in your business and you love how your business is working.
Let’s move on to stage 1 and talk about that and what that means. Stage 1, again, is “I have no cash”. This is where you have a business startup. Your business is failing. What failing means is you’re running out of cash. You don’t have enough cash to pay your bills nor do you have enough cash to fund your lifestyle.
The number one issue you have, when “I have no cash”, is you’ve got to be willing to just find customers who are willing to pay you. What you’re doing here is you’re selling, selling, selling, selling. Nothing counts as much as getting people who will write you a check for whatever your business is providing. It’s all about getting the cash and building enough cash that covers your cost of running your business – not your lifestyle but your business, because when you’re starting your business, while you’re in a serious position, you’re probably going to stop paying yourself a salary or not paying yourself a salary in the first place but you really need to focus on that. You need to have outside resources that can probably support your lifestyle while you’re at stage 1 is really important.
Now, with this stage, you want to get through it as quickly as you possibly can because, if you don’t, you’re going to find that you get stuck there, you don’t have enough cash, the resources that you put aside are not creating enough cash for you, and you end up going out of business. Stage 1 needs to be a relatively short period of time. If you’re in stage 1 for three, four, or five years, the chances of your business ever becoming successful is really, really slim.
Let’s move on to stage 2. Stage 2 is where your cash comes and goes. I call this the hills and valley part of Cracking the Cash Flow Code. You know, there are times where you have plenty of cash and there are times that you have no cash. There are times where you’re able to write yourself a check for payroll. There are times that you’re not able to write yourself a check for payroll. The truth is, with this stage in your life, you need to be getting that solved.
Now, here’s where the problem comes in with stage 2 with most people. Most people in stage 2 think they have 2000 hours a year that they can sell that’s cash creating. Now, this causes two problems. One is, if you believe this, you’re not going to have enough time to market and that’s what causes the hills and valleys. You sell, sell, sell, sell. You fill up all the time available you have to service your customers. But, eventually, you do that work. The work goes away and you have no more work behind it. So, instead of thinking that you have 2000 hours a year to sell, you really only have 800 to 1000 hours to sell. That other 800 to 1000 hours of work in a year needs to be spent marketing which means helping people be aware of who you are and selling which means creating customers who are going to write you checks for the services and what your business provides.
Now, I believe that, in stage 2, you need to come up with this mantra, “60% is full.” What that means is by spending 60% of your time servicing clients, that’s all the time that you have available. The other 40% has to be spent running your business, doing the administrative work, getting ready for clients – all things you’re not able to charge for.
Now what this likely means is that you have underpriced your services by somewhere around 100% because if you only have 50% or 60% of the time you sold and you thought that you’ve had 2000 hours a year to sell and you don’t, that means that what you’re priced at 2000 hours a year for what you need for annual work, you don’t get that. You only get 50% or 60% of that so you need to be thinking about how you can raise your prices so you can afford to only service clients 50% or 60% of the time and spend the rest of the time finding new clients and making people aware of who you are.
Now, you get through that. You’ve worked on the 60%. Your successful with that. You’re getting your clients. You’re selling. So now, your cash flow has smoothed out and that allows you to move into stage 3 where paydays happen every week.
Now, when paydays happen every week, what that means is you’re writing your own payroll. You’re writing yourself checks every week. You’re able to fund your lifestyle fully. You’re able to fund the basics of running your business – not all the things that you need to run your business, but you’re able to fund the basics of what your business are.
You’ve got to find some excess cash here though because that excess cash is going to afford you to start hiring help. Here’s where I want you to think about virtual assistants as being your first hires. You know, if you need somebody to help you along the way and you hire somebody that’s next door, you might have to pay $25, $30, or $40 dollars an hour for that person. If you hire a virtual assistant and you hire them from certain countries, the Philippines are one, you might be paying $7 or $10 an hour for the same thing you’re hiring $25 or $30 an hour. So, learning the skills of how to work with virtual assistants becomes really important.
Now, here in stage 3, I want you to be thinking about a concept. That concept is what I call the 5000-per-hour job. Too much of your time is being spent, in stage 3, doing something that you can hire somebody for for $10 or $15 per hour. I’m going to be that at least 25%, if not 30%, of your time is spent on that.
Now, if you can hire somebody to do that $15-per-hour job and you can find clients to pay you for that 30% of the time that you were doing that $15-per-hour work, you’re going to become more successful. You’re going to start developing excess cash. It’s going to give you time to start doing things where people can find your expertise and you’re going to need to start developing ways of sharing this expertise with the world. You might think about putting together a podcast. You might start doing videos. You might start doing weekly videos. You might start writing a blog. There’s all sorts of things that you can be doing that start showing your expertise along the way but first you need to have the cash flow to support that. Second, you need to be hiring somebody to give you the time to do that.
Now, the most important step, in stage 3, is to start to only market to very specific audiences. This is what I call where you become a niche-a-holic. Now, a niche means that you’re going to work with a very specific group of people who have an industry, or it might be a demographic, or it might be a psychographic – meaning, they have a specific personality. Or, better yet, all three. You’re going to start thinking about, “This is the niche I want to serve. And here are the people I want to serve.”
Now, the people I serve the best are service businesses. Service businesses that have at least five to ten employees is where I like to spend my time. It’s something that I have a tremendous amount of expertise in so, as I’m marketing, I’m marketing to this group. I’m not marketing to startups. I’m not marketing to companies that have a thousand employees. Both, I can service but it’s not the place where I can provide the most value and get the most value for myself as well.
So now, we move into stage 4. Stage 4 basically means you’re halfway there. Now, halfway there basically means I’m funding my lifestyle. I’m getting enough money to write myself a check every week. I’m funding my lifestyle. And I’m funding my business at a level that’s reasonable.
Now, this is where most business owners who have been in business for 15, 20, or 25 years arrive and they stay here. They never move on to stage 5. The reason is they don’t really understand the issues they’re facing and the cash flow shortage that they’re going to have when it gets time for them to think. This is where the people who have helped me develop what I call perma-five.
When I talk to someone in stage 4, who’s 50, 55, 60 – maybe even 65 years old, I ask them when they’re going to leave their business. They say, “In five years.” Now, if I go back two years later and I ask them when they’re going to leave their business, they still say “five years.” Three years later, they still say, “five years.” I call this perma-five. What perma-five means, very simply, is “I’m stuck. I don’t know what I need to do. I know there’s something that I need to do. My business is successful. I’m happy where I am right now. But if I ever want to leave my business, my business is not ready, I’m not ready, and I’m not really sure what I need to do.”
Now, what happens at stage 4 is you’re fully funding your lifestyle. You’ve got some money to grow your business but it’s not as much money as you need to grow your business and you’re always trying to rob Peter to pay Paul to fund growth. You might have started a retirement program but it’s going to be a program that’s not going to provide enough cash for you at retirement because the truth is the amount of money you have for retirement, you only can spend about 4% of that a year and be safe as you go through retirement and you probably haven’t put enough money away for emergencies. If you put any money away for emergencies, I find that most business owners just don’t spend enough effort in putting money away for emergencies.
Now, it could be years where you’re going between stage 3 and stage 4. A lot of businesses, by the way, might get up to stage 4 and then, a negative thing happens, they go back to stage 3, or stage 3 businesses go back to stage 2, or stage 2 businesses go back to stage 1. Just because you’ve reached a stage, it doesn’t mean that you’re going to permanently be in that stage. All it means is that you got to that stage and you’re there right now.
When you’re in stage 4, you’re going to have hired some people. It might be virtual assistants. It might be people who are sitting to you next door. Most likely, you’re going to have some people next door.
The most important thing you can do, in stage 4, is learn what I call the fine art of delegation. The fine art of delegation very simply means that you are able to successfully delegate responsibilities and activities for other people in your organization to do that you’re doing. Now, when you first start to delegate, there’s a really good chance that you’re going to find that you’re not doing it very well.
In fact, many people I know who have five, ten employees, tell me, “You know, I tried delegating. That didn’t work.” The reason it didn’t work isn’t because you didn’t delegate, it’s because you abdicated. Now, one of my favorite sayings is a thing called expect-inspect-accept. That’s EIA. What happens is, when you delegate, you need to set a clear expectation. Then, you need to inspect to make sure that that clear expectation has been done properly. And then, you need to accept the work.
Now, the truth is, when you delegate, which is going to probably happen, you’re going to set your expectation. You’re going to go back to inspect it. But those who first start delegating rarely inspect and they go back and they look at it – two months, three months, four months, then they say, “It wasn’t done right. I’ve got to take it back before because my employees are idiots and they don’t know what to do.” Now, that’s not true. Your employees are not idiots. They’re smart people. They’re probably just not clear on what they need to do. When you go through the inspect part of EIA you’re likely going to have to inspect and then reset the expectation, go back and inspect again, reset the expectation, go back again and reset the expectation. It’s just the way it works and it’s how you’re going to have to do it, if you’re going to become a good delegator.
If you’re going to move past stage 4, you have to absolutely become a master at delegation. The other thing you really want to be doing in stage 4 is you want to have a well-defined niche and you’ll only want to market and sell into this niche. You want to be saying “no” to anybody that’s not in the niche. There’s a really important reason for this. In stage 3, you’re going to establish your niche. You’re going to start talking about your niche. You’re going to start only marketing and selling to that niche. People may approach you that want to do business with you, who are outside the niche. Then, you’re going to say “yes” because you need the business. By the time you’ve reached stage 4, your niches become well-enough established where you only need to be accepting business and talking to people in that niche.
Now, what you’re going to find, when you work with a niche and you work over and over and over with that niche, you’re going to find you’re doing the same thing over and over again because, frankly, people in a particular niche have the similar opportunities and they have similar problems. You’re not very rarely going to get into where you’re doing a one off where you have to learn a whole bunch of information about something that you didn’t know about before and are now starting to move.
So, you’ve got that well-defined niche. You’re only marketing to that niche. You’re only selling to that niche and you don’t accept customers from outside the niche. You are only working with this group.
Now, this is a transition that you’re going to go through it stage 4. In stage 4, you’re going to start with that niche and you’re going to be accepting people. By the time you get to the end of stage 4 you’re going to be start thinking about moving to stage 5. You’re going to make that transition where you’ll only accept business from one type of person.
And then, finally, we get to stage 5. Stage 5, you’ve cracked the cash flow code. You’re paying yourself what you’re worth. The four areas of profit are being fully funded. In fact, the four areas of profit are being overfunded and you don’t have to worry about cash coming in. You’re not really even worrying about cash flow anymore even though every business owner I know always worries about cash flow. The reason is very simple. To get to stage 5, you have to go through stage 1, 2, 3 and 4 and you don’t forget stage 1, 2, 3 and 4. You remember stage 1, 2, 3 and 4 and you say, “I never want to go back to that again.”
The truth is along the way to get to stage 5, you’ve gone from stage 3 back to stage 2. Hopefully, you’ve not going from stage 2 back to stage 1. You’ve gone from stage 4 back to stage 3, maybe back to stage 2 again even and you had to rebuild that because all those things happen along the way that were negative so you know that just because you reached stage 5, it doesn’t mean you’re going to stay in stage 5 for your whole life so you remember those lessons that you learned along the way.
You don’t really want to go back to doing that stuff because, frankly, stage 5 is where you have a ton of fun running your business. It’s the strategic part of your business. It’s where you get to spend most your time working on strategic things that move the ball forward. You might be doing some sales. You might be doing some marketing. You might be doing some customer relations but you’re not involved in customer service. You’ve made yourself operationally irrelevant in your business because you’ve become a master at delegating and you have enough people in your business who are doing all the right things on the side to make your business become a great one.
You have a niche company. You’re delegating effectively. You’re only doing high‑value work yourself. No longer are you spending any time on work that’s $15, $20, $25, $50 or even $100 an hour. All the work that you’re doing is worth at least $250 an hour. And some of the work you’re doing this worth $5000, $10,000 or even $25,000 an hour for work.
Now, I know a lot of you who are listening to this and saying, “$25,000 an hour. That’s ridiculous. There’s nothing I can do that would create $25,000 an hour.” Well, the truth is there are some decisions that you’re going to make along the way where it’s worth even more than $25,000 an hour. That one-hour decision of who you’re going to work, who you’re going to hire, what that person’s going to do is at least worth $5000, if not significantly more. So, realize that when you’ve reached stage 5, all four buckets are being filled, and there’s excess cash, is because you’ve moved your company into a level of excellence where the business has been systematized, people know what they want to do, customers know what to expect, employees know what they need to do, and all you need to do is focus on the strategy that the business works.
At this point in your business, you’re going to be doing several million dollars a year and you’re going to be managing the managers in your business. In other words, you’re no longer talking with people. You’ll be talking with people but you won’t be supervising or helping people who are just working in your business and doing the stuff in your business on the frontline. You don’t work with front liners or supervisor. You work with the people who manage your frontline people. And you might even be managing managers who manage managers.
So, when you’re doing that, you have a lot of freedom for how you spend your time because frankly you don’t need to spend a tremendous amount of time doing this. Where you need to be spending a tremendous amount of time is understanding who your niche is, how you can serve that niche better, helping your people think about where you want to go and, essentially, becoming what Gino Wickman would call “the visionary” in your company.
What you’re doing in stage 5, you’re taking your successful business and you’re doing the five things you need to create an economically and personally sustainable business. You build a team where “you have the right people in the right seat” quoting Jim Collins. The truth is it’s a great place to be because, and when you do this right, life becomes really, really, really fun.
That’s it. That’s the five stages of business that you have in cracking the cash flow. Let’s go back and review those five stages again and understand what they’re for. Stage 1 is “I have no cash.” It’s the very beginning of the business. Stage 2 is “Cash comes and goes.” You’ve got hills and valleys in your cash. Stage 3 is “Paydays happen every week.” You’ve now got a consistent cash flow in your business so you can afford to pay yourself. Stage 4 is you’re on your way there. You’re 50% of the way there. You might be 60% of the way there. You’re funding all the things you need, at least at some level, probably not an emergency fund but you’re funding the other three things and you’ve created what we would call a successful business. Then, finally, we reach stage 5 where you’ve created a sustainable business in your life.
Here’s the thing you can do. I’ve done an infographic on the Cracking the Cash Flow Code. There’s a button below this podcast that you can just click on and go to that. You’ll get that right away. It’s really easy to get. It’s a one-page thing to help you remind what are the five stages of cash flow? Find out where you are and what you need to do to crack the cash flow code.
If you’re interested in having a conversation with me, just go to firstname.lastname@example.org. Send me an email. I’ll send you a link so we can set a time for us to talk. I’d love to talk with you about where you are, what you need to do to crack the cash flow code, and how to make your life better.
This is Josh Patrick. You’re at the Sustainable Business podcast. I hope to see you back here really soon. Thanks a lot for stopping by.