John asked Sam some basic questions and found out that on the surface Sam was doing about everything right. He had a budget for the year, a decent profit target of 7.5% of revenue (consistent with past years), wasn’t on a growth trend, and didn’t spend any money on capital improvements. Sam was completely frustrated with his cash flow picture. John asked Ed if he would take a look at Sam’s company and see if he could offer any advice.
Ed did an analysis of the company and found the following:
- Sam was profitable – no doubt about it. In fact, a little stronger than he thought, nearly 8% on revenue of $5M.
- Sam was controlling growth of inventory and managing accounts receivable.
- Sam’s line of credit was paid off and long-term debt wasn’t a major challenge.
- Sam’s revenue was consistent revenue, varying only 3% quarter to quarter, and always hitting his year-end growth target of 4%.
This troubled Ed until he took a look at Sam’s company’s balance sheet. Ed realized that Sam had a high life style and was taking nearly all of the profit out of the business each year through distributions which didn’t hit the profit and loss statement, and the activity only showed up on the balance sheet. Although profits will increase cash in the business as well as improve equity in Sam’s company, equity didn’t change much from one year to the next. Sam’s cash flow problems were the results of Sam draining the company of all resources to support his lifestyle.
Truth for this week. Lifestyle expenses don’t appreciate. Business profit can provide a dramatic ROI (return on investment in the range of 30% – 45% a year), much better than any stock market investment.
Business Coach & Prophet of Profits
P.S. We help business owners make money and live better lives. This link tells you how. https://dynastybusinessconsulting.com/dan/