It’s a cold, cruel fact that most new businesses go out of business within the first five years of their founding. This is usually because of one reason – they lack cash flow.
Take that a step further. When most businesses fail – regardless of how long they have been in business – it is because of lack of cash flow.
It is very important, therefore, that business profits be used wisely.
Half of any profit made during the first five years of business should therefore be put into a money-market checking account – some place where it will earn a modicum of interest but be able to be withdrawn should the business suddenly need an influx of cash. You may hate to see money sitting relatively idle like that, but unexpected emergencies happen all the time – cars might need thousands of dollars in repairs, air conditioners or heaters might give out…or a business that has been running smoothly for several years might hit a rough patch and need enough money to tide it over until customers resume their normal purchase routine.
The other half of any profit made during the first five years of business should be invested back into the business – in a wise manner. Depending on what kind of business it is, nicer furniture for customers or workers always helps. More sophisticated computer systems can cut work time in half. Training programs for workers are essential – and too often ignored or done haphazardly.
Investing in one’s customer base is extremely important. Repeat customers are the lifeline of any business – it takes more money to find new customers than to keep old ones, so old, regular customers must be treated with respect and rewarded for their loyalty. For example, if you run a sporting center, it may be wise to replace your synthetic grass once in awhile. Many businesses give their customers small gifts at the end of the year – an engraved calendar, shot glasses, things of that nature that can be purchased in bulk with the company’s logo on it, so that it serves a dual purpose.
Any owner of a business pays himself – or herself – a salary, and that must always be looked upon as separate from the business. Investing in stocks or bonds should really be done with that money, rather than from money from the profit of the business. (If the business is making an excellent profit, the owner can always be given a raise. That discretionary money can then be taken and invested in the stock market or in other types of investment opportunities, and if it is lost, it will not harm the business.)