You’re smart. You set your sights on being in the top percentiles of all small business owners (the ones who actually make it). As a result, you’ve decided to grow as quickly as you can. On your growth journey, you’re acquiring clients, investing in equipment and technology, and building your team, but something insidious is happening behind the scenes.
You’ve completed your largest project yet, and the client’s payment hit your bank account. You log-in to mobile banking and stare at the screen. There is no money. Your heart sinks.
This was unexpected. Growing your business is growing you out of business—you are temporarily broke!
Growing a business and going for broke
The first goal of every small business is to become cash stable.
That does involve clients, possibly inventory, and building a team, but not sacrificial and reactive spending—like overinvesting in product/service development that hasn’t been tested in the market, out-of-control expenses, or not paying yourself so you can spend more money in the business. This kind of behavior leaves businesses on rocky ground. Growth typically means you need $1 of expense (cash out) to create $1 of revenue (cash in).
However, so many businesses are cash poor. Even in a healthy environment, growth can still be a drain on cash and slowing growth can improve cash flow assuming your margins and overhead are optimal.
When growth is a break-even venture
At best, business growth is a break-even venture. When money comes into a growing business, what a business owner sees is the return of cash and believes that cash to be profit. Thinking you should reinvest all the profits back into the business, you send out every precious resource to keep growing, but you’re not getting ahead.
Many business owners underestimate the time that investment takes to move the needle and overestimate how powerful that investment will be in the business. There is a significant lag between the investment of growth (money out) and the realization of growth (money in) in terms of cash, which is dangerous for your business.
It’s a bit like playing the lottery. I’ve seen business owners tap into 401Ks, savings, credit cards and their line of credit trying to buy more time. This reactive, band-aid approach masks the real issue—you’re growing broke. This calls for a strategic pivot to create a cash positive position.
How to create a cash positive position
1. Get off the feast or famine roller coaster
Small business ownership is an adventure—it’s full of peaks and valleys. You just don’t want the money to go along for the ride. You need to get your business off the feast or famine roller coaster that traps so many business owners, fast.
All it takes is preparation. Before a commercial plane takes off, it goes through a whole list of pre-flight checks that the pilots, mechanics, flight control and flight attendants complete. If one thing is off, it can delay a flight for hours. This process is repeated hundreds of times a day, often unseen by the flight’s passengers. While flight delays are frustrating, we appreciate the ability to arrive safely.
“Many business owners want to skip the necessary foundational steps to get to the thrill of the flight, only to crash in the process.”
Many business owners want to skip the necessary foundational steps to get to the thrill of the flight, only to crash in the process. The first goal of a business isn’t growth or clients – it’s getting the cash right. For service-based businesses, it’s getting profitable with the least amount of clients. In bigger business, this is a concept called the Minimum Viable Product. For you, think of it as Minimum Viable Profitability (MVP).
When you achieve MVP, you’ve landed on a profitable business model and pricing, with a compelling problem that you solve and a little marketing magic. This means you can prove (or disprove) your business’ ability to generate cash.
2. Build up your cash on hand
The problem I’ve seen with service-based businesses, in particular, is they don’t have enough cash on hand to make the business run. If you’re starting out, 1-2 years of cash on hand makes all of the difference, giving you the time and confidence to make strategic decisions. If you’ve been around for a while, aim for 3-6 months of cash on hand. How much cash on hand varies from business to business.
For one of my clients, our goal is nine months due to the length of her pipeline, project and pay cycle. When Hurricane Rita and Katrina hit the Gulf Coast of Texas in 2005, my heart wrenched as I watched business owners struggle to scrape together enough cash to meet their expenses.
It’s truly frustrating when circumstances beyond your control impact your ability to earn money in your business, but you still have to pay expenses. Sadly, most business owners only have 7-14 days of cash on hand. They don’t have enough cash to weather storms.
When you build up your cash on hand early, you are able to do four things:
- Create a rainy day emergency fund
- Prepay for the growth you want to create
- Gain the freedom to make strategic investments
- Allow investments the time to mature
This gives your business the power to stay steady, the time to correct your course, and the space to complete profitable cycles.
3. Focus on scaling rich
Most business owners think of scaling as getting bigger—not so much. Scaling is just the ability to take $0.50 of expense to make $1 of revenue. While growth is usually a 1:1 ratio, scaling is about creating more revenue than expenses. More revenue than expenses equals profits. When you create enough profits, then you create cash.
“Revenue is vanity, profit is sanity and cash is queen.”
Keep this phrase in mind when scaling your business: Revenue is vanity, profit is sanity and cash is queen. Growing broke is the short-term focus on growing sales, revenue, and clients. Scaling rich is about creating true, profitable cash.
For so many business owners the goal is to build a seven-figure business, and they’ll do anything to get there. I’ve seen enough broke seven figure business owners to know that achieving that milestone does not guarantee a pot of gold at the end of the rainbow.
The best way to avoid this cash-trap (or correct it if this is happening now) is to think about your business differently and do business in new ways.
Win the growth game and scale richly
You can turn this around.
For example, after getting under the hood of one of my clients’ businesses, it became obvious where they were bleeding cash and leaving money on the table. By putting four simple strategies in place, the business went from a loss (-2% net profit) to a cash-boom (a whopping 30% net profit) – even during the slowest time of the year for their business. Getting the cash right is what gives you the freedom to scale richly.
The impact on your confidence and the strength of your business and your team will set you on a course for exponential growth and the profits to show for it. That’s how you become a business that succeeds and thrives.
Stop reacting in your business. Declare that money leaks are no longer acceptable and get off the feast-or-famine roller coaster forever by taking action now.
Leslie Hassler is a dynamic author, speaker, and business strategist guiding women-owned, service-based businesses into more profits, cash flow, and success. Business owners come to Leslie tired, frustrated, and overwhelmed from constantly putting out fires instead of thinking strategically to scale. Using her more than 12 years of experience in business, finance, mindset, and more, Leslie takes multiple six and seven-figure businesses from cash-strapped and struggling to profitable and thriving with her unique Scaling Rich Method. Explore the next steps you need to take to grow your service-based business to the next level, and check out Leslie’s quiz here so you can finally Scale Rich.