Hope you don’t mind that I’m not writing exclusively (or much) about processes and tools for IT Services. My goal behind these blog posts is to provide some insight and value, but they had to be easy to write. Lately, I’ve been writing what’s on my mind. The good news for you is, it’s almost always business related.
I’m in the middle of reading The Outsiders, by William N. Thorndike. It’s all about the best performing CEOs, yet we’ve never heard of them. Cutting to the chase, the greatest secret to their success is noted as being excellent at “capital allocation.” Or as I more simply wrote in the blog title, what to do with your cash.
As I was rising through my entrepreneurship days, by the age 24, I was most heavily influenced by Rich Dad, Poor Dad, by Robert Kiyosaki (and the E-Myth Revisited, by Michael Gerber…see our full reading list***). I was going to escape the rat race by stopping W2 income, owning a business, investing that money into things that make money and joining the rich. Things went pretty well, except that I was doing this to a fault. I was highly leveraged and had no cash reserves. I remember buying a quadruplex during those times. I bought it for $0 down, rented it to pretty much break even and cleared $50K in two years on its sale. Incredible! Except the stress in making that happen caused many gray hairs and taught my then 3-year old how to let the TV babysit her, while I renovated it myself (because I had no cash to hire someone).
Then enter the Total Money Makeover, by Dave Ramsey. Paraphrasing a bit here but I learned that cash is like problem lubricant. It makes you want to hoard your cash, because the lack of stress felt great. Problems really do go away when you have the cash to handle them. I remember hiring a really poor person back in my own IT Service firm. He was cash broke, so he couldn’t afford to renew his car tag. He proceeded to get pulled over, had to pay a fine, still renew his car tag, and had to take a day off work to go to court about it. Simply having the cash would have been FAR cheaper. So this strategy works. Except growing your business and even your assets is very slow when you hoard cash.
I still think cash should be working for you, but you also need cash to work for you as your problem lubricant. Now comes the elusive balance I wrote about in Focused or Balanced. Enter one more book, Profit First, by Patrick Lencioni. The cliff note here is that profit needs to be a high priority line item in your budget to help you feel pressure to push or keep down expenses. Now, the exact formulas in this book did not work for me, though if you can follow them, do it! All my numbers are what work for me (so far). I currently set 10% of all deposits aside into a separate business bank account. That amount builds over time and I calculated that I could afford to take 25% of that balance out every quarter as take-home profit. The other 75% sits there and continues to build. That 75% is also there for true emergencies…let’s say a global pandemic or I totally messed up my tax withholdings. I’m just over a full quarter of doing this and some amazing things have happened.
First, my stance on new expenses has gotten firmer. I’m really frugal as far as “stuff” goes, but I’ll spend money to make money in a heartbeat…all the heartbeats, and that’s my weakness. Now, I’m enjoying those profits so much, it’s a lot easier to keep expenses low and to really vet the ROI and new expenses. As COVID hit, the only financial change I really made was that I was planning on changing my 10% set-aside to 11%, but I decided to hold at 10% to keep some cash reserves in the operating account. Keep in mind, at this point, I’m aching to spend these reserves on something for a return, but I’m coaching myself (daily) to hold on to it during these strange and uncertain times. So, here is where I circle back to Capital Allocation from The Outsiders.
As we enter over a month of COVID, I’ve realized that so far we are doing fine. I have this cash. This really IS the right time to allocate this cash to work on my behalf. This was great timing, actually, because we just had our EOS Quarterly meeting and we decided the highest and greatest use of our time and money outside of our normal client servicing is developing our website more. We just engaged several small business owners who lost some revenues during COVID to work on our website. This timing scored ourselves a little better of a price due, kept ourselves fully engaged, and is setting us up to launch ahead of the competition post-COVID. That is the strategic allocation of capital you should be looking for. All this balanced by the fact that we still have emergency cash in that set aside account, playing the balancing act of cash problem-lubricant versus strategic capital allocation (you could actually say the problem-lubricant is a type of allocation).
When turning these lessons inward to your own business, did you set yourself up to have some cash funds ready to deploy opportunistically on top of an emergency savings account? If not, survive now, but then turn your attention to how you can build these funds in time for the next emergency. Maybe it’s as simple as picking up one of the books mentioned and thinking through it, but act now.
If you do have the capital to allocate, where can you leverage that capital to benefit you, your business, your team, your clients, and/or your community? Is there a money-making project (e.g. marketing or service-development) you’ve been putting off? What about internal projects to reduce ticket-load post-COVID? (Read: Time to Sharpen the Saw). If you see areas that you can get better prices on now, or you have the time to spend now, I encourage you to consider it.
Likewise, how does this message sit with your clients? I bet some of them are also in a position to talk about capital allocation. Even if it’s not IT related, talk to your clients business owner to business owner about the concepts and see if you can help each other. During these times, I believe more than ever we should be serving first and the profit can follow later. In fact, if you want, feel free to share this article to your own connections to start a conversation with them.
Lastly, if you need someone to talk to about business, finance, or even just to break up the quarantine blues, feel free to reach out to me. We’re all in this together and we might come up with some amazing ideas together on a video conference. I’m also told my video backgrounds are worth seeing.
***This is a little embarrassing, but several of the books mentioned are not currently in our reading list page. this is an area that we are working on right now to make the page more up to date (aka easier to update). Hope to have this done by May.