Whenever you grow your business, you spend money before you know the results, or return on that money (i.e. sales). The faster you grow and the more you grow — the faster that growth sucks cash out of your business! There is only one place money can come from to fund growth, your profits. So your growth can’t exceed the money you have available in profits or you start to “grow broke.”
Watch our Law Firm Director Liz Stevens explain the two factors that determine if your business is in danger of growing broke, and how Profit First can help avoid this slippery fate in our video “Don’t Grow Broke!”
Video Takeaways
- Growth Sucks Cash. When you grow, that growth sucks cash out of your business.
- The two factors that determine your propensity to “Grow Broke” are
1) your profit margin
2) your cash conversion cycle
- Find the speed limit of your business’s growth by multiplying the gross profit margin by the cash conversion cycle.
- Profit First helps your business avoid growing broke because when you follow the system you always have money available to fund growth.
Take Action. Calculate the length of your cash conversion cycle. What was the last marketing campaign you completed? Did you have a way to track the return on the cash you spent to fund it? Look at your calendar and figure out how much time it took that cash from leaving your business as a marketing spend until it returned to your business as profits earned off the sales you made from that same campaign. That is an example of the length of your cash conversion cycle.
Next Week! We’ve discussed why taking your profit first is so important. But just how much profit should that be? Next week we’ll discuss your profit percentage number (aka your profit allocation) in:
“How Profitable Should You Be?”
CLARK.LAW
