Greg Crabtree is a CPA, author, and business owner. He also co-authored the chapter on Cash in Verne Harnish’s latest book “Scaling Up”.
I can not recommend strongly enough that every business owner should read and then follow the advice in Greg’s book “Simple Numbers, Straight Talk, Big Profits!”.
Greg has developed the Four Forces of Cash flow model after working with hundreds of entrepreneurs, and learning from their challenges and successes.
The Four Forces of Cash flow are the four basic foundational attributes needed to have a financially stable, growth company.
Tax Provision: Set aside sufficient cash to make quarterly tax payments to end the quarter at as near as possible to a zero tax liability. True wealth is created through wise investment of after-tax profits, so planning and provisioning cash for taxes is vital
Debt Management: Eliminate short-term debt at the end of each quarter, pay down your line of credit and remain current on any long-term loans
Core Capital Target: Once you have paid your taxes and short-term debt, build a cash buffer in order to be fully capitalized. A good Core Capital Target to achieve is two-months worth of operating expenses in a special Core Capital account that goes untouched. In calculating your Core Capital Target, the only costs you exclude from monthly operating expenses are your Costs of Goods Sold (since you typically can secure 30-day terms)
Harvest Profits by paying Dividends to shareholders and paying bonuses to deserving team members who helped get you to this point
Business owners often distort the true reality of their cash flow by manipulating these variables to save on tax liability, interest expense and other considerations.
The primary objective is to show a true picture of the state of a business’s cash position and then build a foundation of strength through a sequence of management actions, that result in the ability to harvest profits and build wealth for the owners.
One of the big pitfalls is owner compensation. If a company is generating $20 million or less per year in revenue, the compensation of the owner working in the business and shareholder distributions can distort the business’s profitability. If the owners are not taking fair market wages but are taking excess distributions, their profit may be considerably lower than what they are reporting.
By ensuring that owners take a fair market wage for their services rendered to the company and then follow a specific sequence to harvest profits, they are intentionally and methodically building an enduring financial foundation for growth.
How can you determine a fair market wage for the owner, simply determine what it would cost to hire someone to do that job?
Once owner’s fair market compensation and proper distributions are calculated and categorized, then the Forces of Cash Flow can be sequentially be built upon to the point of building wealth.
The other common pitfall is using the line of credit as a loan when it is really structured to be a bridge to cover short-term cash flow issues and then repaid. If you need a loan, then get one. Borrow against your line to cover a cash flow shortfall and then pay off the line when your cash flow returns to normal.
Remember, take a longer view of success, in years, not just months or quarters and this intentional approach will yield not only financial success, but also peace of mind.
Get started today by ordering and reading “Simple Numbers, Straight Talk, Big Profits!” by Greg Crabtree.
Dave Baney is the founder and CEO of 55 Questions, LLC, and author of “The 3×5 Coach: A Practical Guide to Coaching Your Team for Greater Results and Happier People”, which is now available in Paperback or a Kindle version at https://tinyurl.com/y8ecykfy
At 55 Questions, we work with successful top executives with a driving ambition to crush their competition. We help CEOs and Entrepreneurs improve alignment, communication, and accountability throughout their organization. www.55Questions.com
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