Why now is the time to think of your business as an investment
Matt Byrne
Director
Summary
Most businesses we work with were started by a person or a couple of people who had a particular skill and ended up working for themselves as a natural progression of their career.
In the early stages of business, you’re hustling to get the next client to keep money coming in the door. To do this you’ll offer discounts, charge less than you’re worth and say yes to anything and everything. As the business grows, you’re doing crazy hours and not making as much money as you probably should be but there is no time to look into it so you just keep hustling and getting by.
The business owner is often focused on making the business bigger by reinvesting all their profits (if any) and focussing on the top line revenue. It’s easy for the status of the business to become the main focus and the owner loses sight of what’s really important…that the business is an investment that should give you a return.
Let’s break that down….say you had $100k cash to invest. Are you putting it in something that:
Takes your time, doesn’t make a return or increase in value.
OR
Runs without your involvement, pays you a dividend each year and grows in value.
I’m pretty certain most people are going with the latter option. As a business owner, you make a lot of investments in your business in the form of:
- Startup funding
- Time
- Risk
- The difference between what you pay yourself from your business and what you could have earned as an employee.
You need to make a return on all of these things otherwise you’re better off getting a low risk, stress-free, better paying job.
Looking at your business as an investment takes a shift in your mindset. You need to start thinking about what the business can do for you rather than what you can do for the business. Rather than focussing on growing the top line revenue, you start to focus on the profit margins, cashflow and returns. Overall, this change in mindset will result in you building a business that is sustainable, grows in value, returns profits regularly, reduces stress and doesn’t rely on you being on the tools.
What happens if you don’t treat your business as an investment?
In our experience, those business owners who don’t treat their business as an investment end up with a business that:
- Has poor cashflow because you’re not charging correctly for the sake of winning the work.
- Doesn’t return any funds to the owner. The owner is often living off scraps with limited wages, no profit distributions and no super being set aside.
- Isn’t worth much because of poor cashflow and low returns.
- Causes more stress for the owner because of the above.
How to treat your business as an investment
Stop focussing on turnover
Revenue is a vanity metric. Having a high turnover isn’t what makes a business valuable or provides for the owners. You can turnover $10 million and end up with a loss of $100k or turnover $300k and make a profit of $200k. Which would you prefer? Personally, I’d take the business that has positive cashflow, makes a profit and creates an asset that the business owner can sell.
Instead of looking at turnover, start focussing on profit margins such as gross profit and net profit. From there you can increase revenue and decrease costs to improve your margins.
Check out these related posts:
Improve cashflow
Businesses live and die by their cashflow. Creating a business that has positive cashflow reduces stress, allows you to pay out profits to the owners and invest in growing sustainably. Having a detailed understanding of your historical cashflow will allow you to forecast accurately and make improvements.
Remove yourself from the day-to-day
Have you heard the saying ‘work on your business not in your business’. That’s what we’re talking about. Being on the tools for 40 hours every week doesn’t leave much time for you to improve the business. By replacing yourself on the tools, you can free up time to focus on the business, improve your reporting, and create new processes.
A business that doesn’t rely on the owner is generally worth more than a business reliant on one person. By removing yourself not only will you be giving yourself some more time, you’ll also be increasing the value of your business.
This doesn’t have to be done in one day, it will take time to transition your role over to other people and to create the processes and procedures for the business to run without your involvement.
Create a budget and set targets
Understanding your long term goals is the starting point here. What do you want to be doing in 10 years? How will your business help you get there? What do you need from your business in next year, in 3 years and in 5 years to get to that 10 year target?
Start with the long term goal then work backwards to the current year. From there you can create financial targets and put these into a budget so you know what you’re working towards and why it’s important.
Once your budget is in place, start reporting each month on your performance against budget. This will give you some context of the performance of the business and will highlight the areas to improve.
Final Thoughts
Changing your mindset is difficult and sometimes it’s hard to look at your business from a different perspective. If you need some external help to point you in the right direction, reach out to the team at Day One Advisory and we’d be happy to give you some pointers.