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.