We’re now at the end of our series on how you can create a sustainable business. Our first four steps are:
- Start with having clear value and value statements which lead to a mission statement that is ten words or less and can be answered with a yes or no.
- Make yourself operationally irrelevant in the day-to-day operations of your business.
- Create a business that has a recurring revenue source or a predictable sales model that makes your business act like it has a recurring revenue source.
- Put together systems that allow your employees to know what they need to do for excellence and let your customers have a consistent client experience.
The fifth step really isn’t something you do, but a result you get. And, what’s that fifth step? Drum roll please…………. Its having enough profit so you achieve all the financial goals that are part of having a sustainable business.
The first thing you need to know.
Too often I hear people telling me that the purpose of their business is to create a profit. Every time I hear that I cringe. You see the purpose of your business is not to make a profit. The purpose of your business is to create a customer that wants to buy what you provide.
Profit is never a purpose, it’s a result. This means that if you pay attention to the first four areas of sustainability, you’ll have enough profits to fulfill your and your business’s financial needs.
So, what are the financial needs a business has?
I’m glad you asked. I find that most businesses don’t make enough money. It’s one of the reasons they can’t find buyers and if they do, the amount of cash the sellers receive at closing is a small percentage of the entire purchase price.
The four essential areas of profit are:
- Your business has to create enough profit for you to have a good lifestyle.
- Your business has to create enough profit for you to have a cash reserve that will allow you to get through six months to a year of dramatically reduced sales.
- You must have enough profit so you can fund growth of your company. No bank is going to loan you 100% of the money you need to grow.
- Your business must have enough excess cash produced so you can fund your retirement plan at a high level.
Let’s unpack each of these issues one at a time.
Are you making enough money for a great life?
You might find that you’re working zillions of hours a week for very little money. If that’s true you’re going to start resenting the time you spend working. You might even be wondering why you started your business in the first place.
When you first started your business, there were financial sacrifices to be made. As your business matured, you probably started to pay attention to funding lifestyle needs. No one likes to be under constant financial strain. If your business doesn’t make enough money you can be sure the financial strain you’ll feel around lifestyle will get worse and worse the longer you have it.
If you’re not hitting a level of profitability that supports a good lifestyle you need to look at your business and see what changes you can make. I would suggest you focus on pricing. It’s usually the easiest place to get a fast result and in my experience, many businesses are woefully underpriced with the products they sell.
What about an emergency fund?
This need is definitely not sexy, and it’s necessary. I’ve never been involved with a business that didn’t fall on hard times. Often, the difference between having a business that survives and one that fails is whether the business has access to funds when times are tough.
If you think your bank will provide those funds, think again. Your bank is not in the business of making “risky” loans. They’re happy to loan you money when things are going well. As soon as your business heads south, there’s a good chance your friendly banker will become less friendly.
In fact, your banker might not only stop loaning you money, they might want all of the money they’ve loaned you back. They might not want it back tomorrow, but today.
Do yourself a favor. Make sure you have six months to a year of operating costs put away. You just might find you need it.
Let’s think about money for growth.
There are two things that will happen to your business. It will either get larger or smaller. Rarely will your business stay the same size for a long time.
I’m hoping you would rather see your business grow than shrink. I’m also hoping you realize that your bank, for the most part, won’t provide you with all the money you need to grow. If your bank is like most, it’ll want to see you put some of your own money into funding the growth of your business.
Your bank might love that your sales and profits are growing. At the same time, they aren’t willing to provide you all the money you need to grow. If your profits aren’t high enough to fund at least 20% of your growth, you might end up in a position I was, having a fast-growing company with lots of profits, but running out of cash.
I can promise you this is not a place you want to be.
Excess cash to fund your retirement.
Too often I have business owners like you tell me they don’t need to save a lot of money for retirement. And too often I find this is a big fat lie.
There’s a good chance that you’ve overvalued what your business is worth. You’ve probably also undervalued what the cost of taxes and fees are when you sell your business. I’ve even created an easy way for you to figure out whether you’re saving enough for retirement. It’s called The Four Boxes of Financial Independence and I’ve put together an EBook that will walk you through the entire process. Just click here to get the EBook.
Here’s a conversation I often have with someone who is over fifty years old.
Me: “When do you want to retire and leave your business?”
You: “In five years.”
Two years later…..
Me: “When do you want to leave your business?”
You: “Five years from now.”
Three years after that…..
Me: “When do you want to leave your business?”
You: “Five Years from now.”
By now, you’re getting the idea. Leaving the business and retiring is always five years out. I call this perma-five.
When perma-five sets in what is really going on is you know you want to be able to retire and leave your business. At the same time, you think you might not financially able to do so. You believe that whatever it is you need to learn, although you have no idea what it is will magically appear and reveal itself to you during that period. Except, it doesn’t and that magical time of leaving your business seems to always be five years away.
There is an easy solution for perma-five. It’s knowing what you need and participating in what we call The Financial Freedom Project. You can learn more about the Financial Freedom Project by clicking here.
I bet what you’ll find is that you’re not saving enough for retirement. This might be why leaving your business is always five years away. If your cash flow is strong enough and you put a significant amount of money in your retirement plan you can pre-fund your retirement. It’s the easiest way for you to stay away from perma-five.
8 Steps to take to avoid perma-five
Here’s what I want you to do.
- Figure out what you need in cash to fund a great lifestyle, an emergency fund for your business, providing enough cash for business growth and having enough excess cash to fund your retirement plan.
- If your cash available isn’t high enough compare where you are to where you need to be.
- Write down all of the ideas you have for what you can do in your business to bridge the gap.
- Go back and focus on the first four areas of sustainability and see what you can do to improve your operations, marketing, sales and focus of your business to get your profits to an acceptable level.
- If you don’t know what to do, find help. It could be a friend of yours, your professional advisors or a consultant who specializes in helping private business owners create sustainable businesses, or you could even have a conversation with me by clicking here.
- Take one step at a time and put together a measurement system that will allow you to track your progress.
- Remember, profits are a result.
- Most importantly, take action.
Why don’t you leave a comment below and let me know what you think about having enough profit in your business?