Cash Flow, Margin & Profit for Small Teams

One of the most important principles in running a sustainable business is setting aside project & cash flow for unforeseen challenges.

The best way to keep your business running smoothly is to focus on the #1 most profitable, most enjoyable, most in-demand service or product you can offer. Adding variation, other services or product, and adding complexity means running risk that your business will collapse and lose cash flow.

Maintain focus on your #1 service, and 1 or 2 other extremely complimentary services that are almost totally seamless with your primary service or offering.

Then, set aside profit as well as a cash flow reserve to ensure you can weather bad stores.

In Profit First, by Mike Michalowicz, he recommends starting at 1% of your revenue into a Profit account. That way, the business runs at 99% off the revenue you recieve, building a habit of taking profit first before allocating expenses.

I think adding in the mentality of 50% of your profit, in addition to profit, should then be set aside for Cash Flow reserve to account for the next 30 days of expenses.

For instance, if you make $1,000 of revenue, set aside $10 (1%) for Profit, and $5 (0.5%) for Cash Flow, then slowly move those numbers up.

In Scaling Up, by Verne Harnish, the section on Cash which includes 3 Chapters, is one of the most important books on Cash Flow and Profit I’ve ever read. Get that book, and read the Cash section over and over.

Mike Michalowicz defines Profit as not a reserve for Cash Flow, but as a place for Distributing to the business owner as a reward for taking the extreme risk of running a business. And that, eventually, you will use 50% of that as a back-up for the really, really tough times. He states that most fiscally responsible companies will aim for 10% of their revenue to allocate to Profit.

However, in Scaling Up, one example they include is to move from 10% Profit, and an extra 5% for Cash Flow which helps fuel business growth, or to give as team members as a bonus or extra distribution to the team. Always maintaining a 10% to 15% profit/cash flow system, which the author of Simple Numbers. Greg Crabtree states that financially healthy companies always keep a 10% to 15% flow in the business to either grow or maintain.

In a Minimalist Business, the goal should be to work up towards 15% to set aside for Profit and Cash Flow:

5% for Cash Flow (to prepare for back up and funding the next 30 days of business)
5% for Profit (Distribution to owner and team)
5% for Vault (a super-super back up)

For instance, in a business doing $100,000 in revenue, then over the course of 12 months you should have:

$5,000 in Cash Flow Reserve
$5,000 in Profit as distribution to Owner and Team
$5,000 in Vault for extra circumstances

If you ever dip below $15,000 for the year, because of a bad month or quarter, it is time to adjust the business.

Designing a Minimalist Team

There are two major ideas in the world of business.

One is to stay small and do everything yourself, which is the Solopreneur. This is what Robert Kiyosaki in the book Rich Dad Poor Dad calls being stuck. “If you want it done right, you gotta do it yourself.”

The other is to grow, grow, grow, like a giant business, get more funding, more customers.

In between is a Minimalist Business. A business where you run on a team that is just the right size for what needs to be accomplished. Small enough to be lean and make adjustments, and not too small that everyone gets burnt out, or everything is just on one person’s responsibility.

There are over 22 million solo-person businesses in the U.S. I’ve done this now for 9 years, and I can say that after a while, it just gets tiring. There are tasks which drain me, and still tasks which I love. To keep your business sustainable yet lean, you need to find people who can compliment your strengths and take over on your weaknesses.

Start by filling positions in the areas you loathe doing. Build a system, design processes and checklists, then find someone who loves doing those tasks.

A minimalist business is one that is 3 to 5 people. That’s because larger teams become inefficient and start to add layers of beuracracy. But teams that are too small can be spread then, without enough support or redundancy. There should be back-ups. People get sick, they get tired, burnt out, need breaks, or need help during busy times. So if the business is just 1 or 2 people, your unit, pod or team will be unreliable at times. This concept I’ve seen from the book Team of Teams written by General Stanley McChrystal, as well as other organizations which create lean, minimalist systems.

Create a strong minimalist unit of people by creating pods of 3 to 5, where each person is in the role that fits their strengths the best. The, work on perfect that pod or unit as much as possible so that it becomes more efficient, more profitable, and that the team supports and builds itself.

A business owner often times screws up the unit by adding in what Michael E. Gerber in “The E-Myth Revisited” as “The Entreprenurial Mind.” The entreprenuer comes in with 100 new ideas per day, then inserts himself or herself and starts changing the business model over and over, as if it were a start-up trying to figure out the business model.

But once the business model is figured out, the business owner needs to flip the switch and allow the model, the unit, the pod, or the system of processes to run itself, only making minor tweaks as needed (with approval of the entire team). This is what author Verne Harnish, known for his book Scaling Up, constantly says about “what got you here won’t get you there.” The business owner does everything they can to find a business model that works. But to get to the sustainable, minimalist business, you will then have to apply a new methodology of maintaining the system. Make adjustments as needed, as Mike Michalowicz says in his book Clockwork on the chapter called “Keep an eye on your business” by developing metrics, a scoreboard or using simple numbers (like in the book The Great Game of Business) where you make sure the business is healthy through metrics such as: How many people are on the team, how many projects or products can that team make per month, how many new customers are coming in, how many customers are happy using the Net Promoter Score, etc.

Once the model is figured out, let the business sustain itself. What is nice about a Minimalist Business is that once the unit is figure out, you simply maintain it. Like a garden that is filled out. Once the garden fills out the alloted space in the Garden, you simply prune, water and maintain the garden. Pull out weeds, make adjustments and plant new trees when old ones die. Maintain the business and keep your eye on it on a weekly or daily basis using metrics. This is what author Paul Jarvis in his book The Company of One means when he says “Build a business that is enough.” A garden which grows, grows, grows eventually becomes sloppy and unproductive. The plants overcome each other, and becomes cause. Build a business, or a garden, which uses the space properly, and make it beautiful, functional and sustaining, with a few gardeners watching over it and taking care of it to create a beautiful, healthy plot.

Identifying Tasks & Services You Don't Love Doing

When growing and sustaining a minimalist business, one of the most important things you can do to develop a successful career is to identify all the tasks you don’t love doing first.

This way, when tasks come up you don’t enjoy you can first plan to eliminate them, if possible, automate them, or eventually delegate to someone else, freeing you up to focus on what you love doing.

One of my biggest mistakes was first delegate tasks I was good at, but actually enjoyed doing when it came to design work, and then having myself do things I don’t love doing, such as invoicing, or tracking project management.

I’ve heard someone else call it a To-Do List, and a To-Don’t List. The Do-Not-Do is equally or more important because a Minimalist Business needs to stay focused on its number 1 core service, without deviating and getting distracted by new ideas.

When building a Minimalist Business, you must have numerous layers of accountability. Having other people, systems, and “Rules” which force your to be focused. As an entrepreneur, it’s easy to get sucked into doing new ideas that seem interesting, but are truly a distraction. A Minimalist Business focuses on it’s #1 core service that is the most enjoyable to you and the most profitable to you and to your Clients, and perhaps as 1 or 2 other very minor, supporting services that re-enforce the original #1 core service.

For all the tasks that a business must normally have, such as marketing, accounting, invoicing, managing, designing, developing, shipping and so on, identify the ones you love doing, and the ones you hate doing, so you can plan to delegate the items which are necessary to run your business, but you loathe.