Greg Crabtree: How to Keep the Cash Flowing at Your Business
by Nick Nanton
This month, I’d like to share some profitable wisdom from a guy who definitely has a lot of it to spare.
I had heard of Greg Crabtree and his book, Simple Numbers, Straight Talk, Big Profits: 4 Keys to Unlock Your Business Potential, for a few months before I actually talked to him. Verne Harnish, who wrote the bestseller, Mastering the Rockefeller Habits, said, “It’s one of the top ten books of the year, you’ve got to get it.” Then my partner Jack also told me I HAD to read it – and to make sure I did, he dropped a copy on my desk!
Well, I picked up that copy and I’m glad I did – there’s a reason it has a 5 Star review average on Amazon. Greg has consulted with us on our accounting and finances and we’ve loved the results. Recently, on one of our Platinum Coaching calls, I had the opportunity to talk with Greg about how any business can drill down on the numbers to really make profits soar.
Although Greg’s background is as an accountant, he feels his profession has really done businesses a disservice by not providing the numbers they need to make the right financial decisions. Over the years, the entrepreneurs he worked with in his hometown of Huntsville, Alabama, challenged him to provide simple, understandable data they could act on. That, in turn, caused him to develop some simple ways to help companies and entrepreneurs make the best financial moves for their future.
One of the biggest challenges for a small or medium-sized business is cash flow. Greg, however, says it’s not usually a cash flow problem they have, it’s a profitability problem. If you can get up to realizing a 10 to 15% profitability, you have a good chance of eliminating that cash flow problem if you deal correctly with what Greg calls “the Four Forces of Cash Flow.”
Force #1 - Taxes: Nobody likes to hear it, but the first thing you should do is set your tax payments aside so you don’t have trouble down the line. Greg says, “The number one key performance indicator of true wealth creation is how big of a check you write to the IRS.” Of course, there are things you can do to minimize your taxes, but, in general, those methods usually involve using money to buy tax credits or put in some other kind of investment. That means the money is locked up and you can’t use it – and, of course, that leads to more cash flow problems. Plus, in general, you’ll have to pay those taxes later – and, most likely, taxes are going to go up, not down.
Force #32– Line of Credit: The second thing you need to consider is getting off whatever lines of credit you’re using. To Greg, lines of credit are like crack cocaine to entrepreneurs! The only exception is if you’re using that line of credit to fund profitable growth, instead of covering losses. Also, if you’re in a business that requires you to buy and use heavy equipment, obviously a line of credit is probably going to be a necessity.
Force #3 – Core Capital:
Your next step, and the best possible scenario for your business moving forward, is to create a core capital cash balance from your after-tax profits that allows you to have two months of operating expenses and cash in your business. That’s what being a fully capitalized business is all about and it can become a magnet of opportunity. You’re not struggling week-to-week - instead, you’re building from a debt-free foundation.
Force #4 - Distribution:
Most of you reading this are most likely an S corporation or an LLC – so, once you’ve taken care of taxes, once you’re off any lines of credit, and once you have your two months of expenses socked away, you can then distribute your profits to all shareholders and take it out of the company – or, of course, you can reinvest it in your business with an eye towards some aggressive growth. Either way, you can be sure all your obligations are taken care of, and you can move forward as you want.
Greg believes understanding your profit model is the most important thing any entrepreneur or business can do. In his words, “You’ve got to learn how to self-develop your capital. A way to do that is you make sure you have profits in the business after you paid the taxes - and remember that the cash flow cycle requires about 10% profitability for about three years. We see people be diligent and disciplined for those three years and maintain their 10% profitability – and that, in turn, creates a foundation that most of their businesses can build on forever.”
You can find out more about Greg and his awesome advice at the website for his book, www.SeeingBeyondNumbers.com. See for yourself – his numbers definitely add up!