When chatting with potential sellers, that are interested in rolling equity, I often get asked ‘what happens at the end of each year?’ — referring to distributions.
Here is how we think about that.
First, being profitable and having positive FCF is not a given, but it is required. We want to be profitable, and we want to make choices and decisions that align the goal of being profitable.
“You can’t go broke making a profit”
or as the great @jasonfried has said….
“When profit’s a requirement, it becomes a lot harder to step in the bullshit.”
Does this mean we won’t make bets? We won’t take calculated risk? We won’t sacrifice short-term cash for long-term gain?
Absolutely not. In fact, those are the type of bets we often choose.
How do we do that at the end of every year? We run through a very simple process.
Assuming there is even $1 in profit. We sit down as a leadership team, board, etc and go through a waterfall approach of questions…
1. Are all obligations and responsibilities paid and accounted for? Audit, taxes, etc.
- If yes, move on. If no, pay them.
2. Do we have an appropriate amount of reserve cash in the bank to support the existing business? E.g. 3 months, 6 months, 9 months, whatever your working capital requirement is.
- If yes, move on. If no, that’s where the money goes.
3. Looking at our current business and where it is [TODAY], is there anywhere that we can improve the existing business (structure, people, service, assets, etc.) by using cash? Replacing existing fleet, hiring somebody to fill a position that’s been open, etc?
- If yes, there is something we need to improve existing, then pay it. If no, move on…
4. Looking at our budget for next year, is there a need from a cash standpoint to ensure we are providing enough resources to hit this budget? New marketing initiatives? New assets? This could even be funding acquisitions off of our balance sheet.
- If yes, fund it. If no, we are already covered via our business model (+working capital) or reserve amount. Then move on…
5. Do we have sufficient money in the ‘oh shit’ fund? We think we need 6 months cash? Great, add 2 more months to it. Etc.
If we do, and this could be a LOC, or other….awesome. If no, fund it.
—-
Okay, we’ve
1. Paid all of our obligations
2. Funded our reserve and working capital
3. Improved existing structure with resources
4. Funded our growth budget or ensured there is enough WC for it.
5. Ensured we have a back-up liquidity available
Now….we distribute what is left over.
1. We require profitability
2. We take care of our obligations
3. We fix our house
4. We ensure we can do additions to our house
5. We make sure cash is always king
6. We eat when there is room to eat.
Here is how we think about that.
First, being profitable and having positive FCF is not a given, but it is required. We want to be profitable, and we want to make choices and decisions that align the goal of being profitable.
“You can’t go broke making a profit”
or as the great @jasonfried has said….
“When profit’s a requirement, it becomes a lot harder to step in the bullshit.”
Does this mean we won’t make bets? We won’t take calculated risk? We won’t sacrifice short-term cash for long-term gain?
Absolutely not. In fact, those are the type of bets we often choose.
How do we do that at the end of every year? We run through a very simple process.
Assuming there is even $1 in profit. We sit down as a leadership team, board, etc and go through a waterfall approach of questions…
1. Are all obligations and responsibilities paid and accounted for? Audit, taxes, etc.
- If yes, move on. If no, pay them.
2. Do we have an appropriate amount of reserve cash in the bank to support the existing business? E.g. 3 months, 6 months, 9 months, whatever your working capital requirement is.
- If yes, move on. If no, that’s where the money goes.
3. Looking at our current business and where it is [TODAY], is there anywhere that we can improve the existing business (structure, people, service, assets, etc.) by using cash? Replacing existing fleet, hiring somebody to fill a position that’s been open, etc?
- If yes, there is something we need to improve existing, then pay it. If no, move on…
4. Looking at our budget for next year, is there a need from a cash standpoint to ensure we are providing enough resources to hit this budget? New marketing initiatives? New assets? This could even be funding acquisitions off of our balance sheet.
- If yes, fund it. If no, we are already covered via our business model (+working capital) or reserve amount. Then move on…
5. Do we have sufficient money in the ‘oh shit’ fund? We think we need 6 months cash? Great, add 2 more months to it. Etc.
If we do, and this could be a LOC, or other….awesome. If no, fund it.
—-
Okay, we’ve
1. Paid all of our obligations
2. Funded our reserve and working capital
3. Improved existing structure with resources
4. Funded our growth budget or ensured there is enough WC for it.
5. Ensured we have a back-up liquidity available
Now….we distribute what is left over.
1. We require profitability
2. We take care of our obligations
3. We fix our house
4. We ensure we can do additions to our house
5. We make sure cash is always king
6. We eat when there is room to eat.