I often hear clients speaking of cash flow, typically when they do not have enough liquid funds coming through or when they are happy because their clients are paying very well. I seldom hear them talk about the reciprocal effects of cash flow for their business and hence for their household as related to their balance sheet.
We are in terrific economic times right now. Banks are lending, builders are building, people’s homes have gone back up in value, credit is being extended for the acquisition of new ‘assets’ (and liabilities, watch out!) and I am reminded of 2005-2007. Gas is cheap – much to the chagrin of my clients in the oil business or related industries, but the average consumer is psyched. Unemployment is low and new jobs are popping up. It is a fun time in our country! This is the perfect time to take advantage of positive cash flow to optimize your future.
Balancing debt and investment
I am not in agreement with being scared of debt and using all your cash flow to pay off debt like Dave Ramsey would have you do. I am not in agreement with depriving oneself of dreams like college courses, a new vehicle, or home improvements like Suzi Orman would have you do until you have multitudes of savings set aside. While I think their messages have merit for a bulk of America, I write this to my client base who are comprised of entrepreneurial business owners not W-2’ers. I am in agreement with using positive cash flow to spearhead your next great investment.
By the word investment – I mean something that will bring residual cash flow to the investor. Savings will run out…it always does. Paying down debt is admirable and we all should be actively working on that aim…but having credit available is imperative. When a client understands how to read their balance sheet and watches as their assets increase (cash, A/R, Fixed Assets, Notes Receivable, Real Estate, etc) and their liabilities decrease (A/P, Credit Card Debt, Loans Receivable, etc.) they begin to truly improve their position. What they can then do to strengthen their position is to use that swing to their advantage and buy an asset (another business, real estate, extend short term interest bearing loans, etc.) to nurture and convert into positive cash flow for the future.
Use your cash flow wisely
I see many clients who start to have positive cash flow and they improve their balance sheets (or they don’t) and they take the surplus and spend it on things, trips, or liabilities that do not make them money. I agree that we only live once and to seize the day…but that doesn’t mean putting in a pool will grow your asset base. Buy a house, love that house, improve that house with money not from an equity line against that house, and then keep that house and rent it and move onto your next house. You hold the cards in this scenario…sell when you WANT TO, not when you have to. Invest in a business, invest in a flip/income property, invest in a person via an interest bearing loan…but don’t be shocked when there is work involved and when sometimes is doesn’t go as planned. We learn the greatest lessons from failure. But for the resilient…they almost always come out on top for taking this leap of faith.
Diversify your income
Don’t rely on your income from one or two sources for a household!! This is the scariest thing I unfortunately see repeatedly. The amazing economy that we are seeing right now will change. History has taught us that. During terrific economic times when there is positive cash flow, we must be prudent and invest for the future. Don’t necessarily invest in a business that you are already good at or that is your background if the ROI of that business is weak. Invest in a business that is PROFITABLE. Don’t invest in a single family home, as their ROI is weak. Invest in a multi-family home that has proven positive cash flow. Don’t sell your primary residence and suck all the profit of the sale out to buy a bigger, better, blingier house. Instead, save for your next house like you saved for your first house. Buy your second house while keeping your first house. Let someone else then rent it and buy that asset for you.
Again, I write this for the true entrepreneur. This is not intended for non-entrepreneurs. If you have positive cash flow and you are focused on improving your Balance Sheet…then the tools for your next great investment will surface and so long as the mind is open to opportunity. It is out there for the taking.
By Stephanie Robl