Running a business and generating cash is tough. I am often asked, “what should business owners invest in” once they have made it out of the Struggling Quadrant. The most popular leading answer I receive is real estate, real estate and real estate. There is a common belief amongst business owners suggesting that owning the real estate their business operates out of is an excellent investment and use of their cash flow. In this blog entry, I will provide a different perspective that I believe provides a better return on cash compared to owning real estate. In my experience, I have learned the hard way that the best investment returns result from unlocking value in my business.
Let’s start with your business
Many owners work hard to generate cash from their business’s products or services. As profits increase and cash becomes available (see “Cash in the bank is not profit“) many business owners begin thinking about where to invest it and seldom do they consider the following idea:
Sometimes the simplest answer is the best answer. Work through these questions and discover how your best investment is probably your business.
- What is your business good at?
- How could your business be better?
- What can you invest in right now?
What is your business good at?
What does your business do? Why do customers purchase your product or use your service? Is it the experience? Is it your knowledgeable team? Is it customer service? Is it the quality of your product? Is it your incentives or promotions? Is it the value compared to the cost? Is it your hours or turnaround times? Is it your inventory availability? Pick as many attributes as you can and rank them in order of importance. A list like this is helpful and should be updated regularly because it is the starting point for answering the question: what should business owners invest in?
How could your business be better?
Take a moment to walk through this simple example:
Riley runs a lemonade stand, sells 100 glasses of lemonade daily, and makes $100 cash. There are two basic levers that Riley can use to generate more money for this business. Sell more glasses of lemonade or reduce the costs associated with the existing sales (or a combination of both). To do either, Riley will need to make business decisions about how to invest cash to get a better result including:
- marketing strategies that increase awareness to potential customers
- retention strategies that help existing customers come back
- referral strategies that encourage existing customers to spread awareness
- software systems that track and manage orders, customers and prospects
- hiring people that are able to service more customers
- increasing inventory to get better prices on the costs associated with glasses of lemonade
- opening another location to reach more customers
Hopefully you get the idea.
If your business is generating profit, the best place to invest cash would be in the strategies or tactics that would help your business be better. Your business will not produce a worse return than what it is doing now. A company that focuses on being better has an opportunity to create more cash flow and be the best place for a business owner to invest.
What can you invest in right now?
Using the list you created of attributes ranked in order of importance based on what you think your business does well, what is the best investment you can make right now? Do you need better people? Do you need better systems and processes? Do you need to improve the experience your customers are having?
What should business owners invest in? They should invest in strategies and tactics to help their business generate more cash flow. A profitable business will not be less profitable by deciding to double down on what it does best.