The Dow is still trading in record territory, but the question is, whether or not this is justified. Is this a bubble? It might be. The indications based on what I read around the web this week, are that the economy IS improving, but not at the rate that the market would have us believe.
Meanwhile it’s time to focus on our businesses! This is my way of saying, “focus on what you can control. Let go of the things you can’t.”
This month, I’ve been focusing on financial statements, and strategies around the same.
If you want to grow your business, you have to make a profit, first, it’s true. But lots of businesses profit, while they still go out of business.
Here’s what most business owners do wrong, after they’ve made a profit.
They fail to retain the profits. When was the last time you looked at your retained earnings? Did you understand it? The equity section of your balance sheet represents everything you’ve ever earned and lost in the business, plus what you’ve contributed, less what you’ve taken out.
The strategy has to go well beyond making a profit. You have to think in terms of growing that retained earnings section of your balance sheet.
The key is to increase assets, while you decrease liabilities. There are many less obvious implications here. When you purchase an asset, that doesn’t increase equity, because something else on the balance sheet offsets that. Either a corresponding reduction in cash, or an increase in a liability, or a combination of both.
You have to play the tape all the way through. I just added an asset to my books. Now I want to reduce the liability at a rate that exceeds the rate of depreciation on my asset. Then consider the interest cost of that debt, which also dilutes your equity.
Next you have to look at what the ROA on that asset is. The asset needs to increase your income at a rate that is sufficient to pay off the debt. That debt needs to be paid off at a rate that exceeds depreciation plus interest.
This is the kind of strategy that keeps a balance sheet strong, and if you watched the videos above, then you saw an example, of exactly how this kind of strategy can dramatically improve your Quick Ratio, month over month.
Now THAT’s managing from the numbers, and THAT’s cash flow positive!
Have an absolutely fantastic week!
Additional resources mentioned: