Back in the spring of 2020, and in the early days of the pandemic, the world found itself in the midst of a toilet paper crisis.
Believe it or not, I’m going to draw a parallel between that toilet paper fiasco, a small business’s profitability and then, move into managing your small business’s cash flow.
I bet you’re wondering … what on earth does toilet paper have to do with small business cash flow? Let me explain.
The Surprising Connection Between Toilet Paper and Small Business Cash Flow
My wife and I returned back to Canada in early March 2020. In and around that time, the world was just getting ready to deal with the pandemic.
Since we had been away for a better part of the winter, our personal food stock consisted of a few cans and some pasta. We needed to stock our house with fruits, vegetables, milk, and so on. We also happened to be down to our last few rolls of toilet paper.
Now normally, that wouldn’t have been a big deal. We would have headed out to the grocery store and bought some more. BUT, it apparently was a big deal in the world of the virus pandemic, when everyone was stocking up on toilet paper, and there wasn’t any on the shelves.
So, the day after we got back, I headed to Costco. I got there before the store opened and waited in line for them to let us in. Once the doors opened, there was a mad rush to the back of the store. Apparently, the store had received some rolls, and the customers were rushing to be first in line to get the new batch.
I made my way to the back of the store, but by the time I got there, nothing was left. I did manage to get 12 boxes of tissue paper, figuring that tissues would do as a reasonable substitute.
Fortunately, the next day my wife did manage to find 24-rolls.
Now the world is wondering what the paranoia is about toilet paper.
You wonder – why did people panic?
People were worried that if the stock of paper didn’t get replenished in time, then it’s possible they might run out.
You worry about the same thing. What if you run out of toilet paper. What next?
So you keep an eye open at the stores, and whenever you see some on the shelves, you buy.
Everybody panic buys.
So the stores run out.
You’re still wondering what this has to do with your business’s profitability and cash flow?
Many small businesses ran out of money during the spring of 2020. Many closed their doors. Frankly, many are still closing their doors and wondering how they’re going to make it.
Because they didn’t save for a rainy day.
For those who manage to make it through their cash flow problems, I suspect they’ve learned their lesson.
This brings me back to childhood memories of my grandfather.
My grandfather was a war survivor and lived with little to no food on a daily basis during the war.
When I was a young child, I have distinct memories of my grandfather not letting me leave the table until I finished every last bit of breadcrumbs on my plate.
He lived for so many years in constant fear of not having enough food to survive, that those haunting memories of living through starvation were so indelibly planted in his mind. As a result, he always made sure he had enough stock of food in his house.
My grandfather also recognized how valuable food was that he made sure I didn’t leave the table until I was finished my plate.
Three Lessons Learned:
- I’m now stocking extra toilet paper in fear of running out or getting caught once again with no stock
- Many entrepreneurs who unexpectedly ran out of cash, or nearly ran out of cash have promised to take better care of their profits in the future
- I learned at a young age from my grandfather how important it is to appreciate the things you have in life: health, family, peace of mind, and to always save for a rainy day
Let’s bring this conversation into the business realm, and address cash flow and profitability
Society Has a Spending Problem
So many people mass-consume. There’s a term – conspicuous consumption.
People keep consuming, without worry about the future until they have to worry about the future.
Here’s a sobering statistic: 69% of Americans have less than $1,000 in savings.
Many people choose to forgo their future savings for today’s pleasure without worrying that they might need some of that money for an emergency. The same holds true for small business owners.
Now that they’ve been through a cash crisis and realize how fleeting their limited cash position was, they now understand that they need to do a better job of managing their cash.
Every entrepreneur is in business to maximize profits, but, that’s sometimes easier said than done.
Just because you’re a rockstar salesperson, entrepreneur, or marketer, and you’ve managed to build your business to new levels of revenue, doesn’t mean that you understand how to manage profits, cash flow, or, for that matter, create wealth.
When I was running my small business, the one I operated for 27-years, I managed to produce a positive cash flow for 27 years. In fact, I didn’t have a negative month of cash-flow for 288 months. In a row. And that includes 3 recessions.
In 2018 I wrote the bestselling book, The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with your Business’s Profits, (you can download a free copy from that link).
The book was number one on Amazon in both the non-fiction and business sections with over 50,000 copies sold
In the book, I detail how an entrepreneur needs to invest their cash in order to create wealth.
But, what if your business isn’t making any profits?
My book is about investing your profits. The presumption is that your business has profits.
But, what if your business is barely profitable?
Do you have a system in place to
- Improve your business’s profitability by three, four, or even more times
- Normalize cash flow and help you better understand the cash you have in the bank
- Prepare your business for future growth
How to Turn Your Small Business Into a Profit Machine in 60 Days
How Much Cash Should a Small Business Have on Hand?
The amount of cash a small business should have on hand will depend on whether you want your business to survive, or thrive. So let’s address both.
Small Business Cash Flow for Business Survival:
If you want to survive, you should have a minimum of six to nine months of today’s fixed costs on hand. Add up your insurance, rent, salaries, vehicle leases, and everything else that you must pay every month, and multiply that by a minimum of six to nine. Stick that money into a special savings account, label the account “emergency business cash flow,” and don’t touch those funds unless you absolutely need to.
Small Business Cash Flow for Your Business to Thrive:
If you want your business to thrive, then you should have five to six times your last year’s business EBITDA on hand. Yes, you read that right. Five to six times your last year’s EBITDA.
If your business made $500,000 in profit last year, then you should have $2.5 million to $3 million sitting in an emergency cash account.
Remember, five to six times EBITDA is a thrive number, not a survive number.
In the above scenario, $3 million would be sufficient to sustain your monthly fixed costs for a long period of time (presumably), but more importantly, would provide you enough of a war chest to make a strategic acquisition, and/or expand your business when your competitors are selling for much less, and hiring and advertising costs are down significantly.
I didn’t just pull these numbers out of nowhere. I’m basing this on a formulaic approach to wealth creation and business management.
Now, I’m not just going to leave you hanging. I’m going to show you a simple trick that I deployed in my business that helped me manage my business’s cash flow and produce 288 months in a row of positive cash flow.
How Can You Manage Your Small Business Cash Flow So You Can Turn Your Business Into a Cash Machine?
When I was running a business, I managed my business’s cash flow on a daily basis. Not weekly or monthly but daily.
I recognized that maximizing my business’s cash flow would lead to a healthier business and, in turn, would provide me with a better opportunity to expand. And presuming I kept the gross margins the same and watched my fixed and variable expenses, the larger the business, the greater the profits, and the better the cash flow.
Cash flow should never be a secondary concern.
No cash means no business, and while it’s also true that no sales, marketing, accounting, or customer service also means no business, the lack of cash is an existential threat that will put you out of business.
If you’re not in business to maximize profits, then why are you in business?
I deployed a somewhat archaic method of watching cash, and managed it to a six-, seven-, and then eight-figure revenue business, with healthy gross and EBITDA margins. Consistently healthy gross and EBITDA margins.
How to Improve Small Business Profits – The Small Business Cash Flow Strategy
A business has many known fixed and variable expenses.
Rent, for example, happens every month. So does payroll, taxes, and insurance, along with a long list of other known expenses that you incur when you’re in business.
Whether you like it or not, you owe rent next month. And the month after that. And the month after that, and so on.
What are your business’s largest expenses?
For most businesses, rent, taxes, and payroll are the top three.
So how can you manage your fixed and variable expense, month after month, and still have plenty left over for profits?
Small Business Cash Flow Trick:
I took a page out of George Clason’s book, The Richest Man in Babylon, where one of Clason’s tenets, or as he calls them, “The Five Laws of Gold”, is to “pay yourself first”.
I did that in my business. I paid myself first. I watched the profit bucket carefully. I managed the profit bucket and grew it by investing in other asset classes that produced healthy returns.
In my 75-minute course, I will teach you how to:
1. Improve your business’s profitability by three, four, or even more times
2. Normalize cash flow and help you better understand the cash you have in the bank
3. Prepare your business for future growth
4. Provide a framework for using your business’s profits to create wealth outside your business.
And the best part is, you don’t need an accounting background.
If you’re an entrepreneur looking for the secret to unleash your business’s profit potential and prepare your business for growth, then this course will help you get there.
I will teach you, step-by-step, the processes you need to take in order to build huge profits in your business. I will teach you how to pay yourself first, and best of all, leave plenty of cash leftover in the bank for the “just in case” moment I was speaking about earlier in this blog post.
You can get more information on the course here:
And you can watch the video here: