Sooner or later every business struggles to survive, some more often than others. Some don’t make it.
To keep a company going, four competing requirements must balance to find the “sweet spot” of sustainability. These requirements are not exactly what they teach in business school, which is geared to make you a better employee—managers, directors, and board members are still employees. I’m talking about what I’ve learned in the entrepreneurial school of hard knocks. As shown in the graphic, the four competing but interdependent goals are:
- Cash Flow
- Growth is simply a measurement of change in your business. Is it worth more or less as time goes on? Are your cash flow, leverage, and equity growing or shrinking?
- Growth must be balanced against cash flow and leverage. Failure to achieve this balance can cause us to make mistakes that can endanger the profitability or survival of our businesses.
- Leverage business speak for debt. The financial sense of the word seems to be metaphorical, using debt to give a little of your own money more economic force. Most of us have to use debt to grow our rental portfolios or even operate our redevelopment businesses.
- While leverage may be necessary for growth, we must balance it against cash flow and equity. Too much debt leads to negative cash flow, which eats away at our equity. Insufficient equity makes lenders skittish about giving us more money.
- Cash Flow
- Cash flow is a measurement of the money coming into and leaving our business. Positive cash flow means we’re bringing in more money than we’re spending. Negative cash flow means we’re spending more money than we’re bringing in and have to put more of our own resources into the business to keep it going.
- Cash flow balances against equity and growth. It is a factor in how much leverage is available.
- The traditional definition of equity is the remainder after subtracting debts from assets. I agree with that definition, but I also include captured profits in my working definition of equity. Actual profits either add to equity or become part of your cash flow.
Equity should be everyone’s goal.Hermann says please like and share!