ASCII IT SUCCESS SUMMITS 2020
Featured Keynote
Frank Abagnale
Security Briefing : The Art of the Steal
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ROBIN All meals and workshops included at no cost ( value $ 1,875 ) falling for the trap of using debt to buy an asset at year-end just to save on taxes . This ends badly over the long run , unless the asset is critical to improving profitability .
Force No . 3 : Core Capital Target
Meeting your core capital target means having two months of operating expenses in cash after you have set aside money to pay your taxes — and assuming you have nothing drawn on your line of credit . In our opinion , any company that can meet this criterion is considered fully capitalized and can start harvesting profits for either further growth opportunities or distribution to shareholders for wealth diversification . If business owners harvest profits before debt is cleared , they risk putting the business into an undercapitalized situation . This is a problem that plagues many growth companies .
The definition of two months of operating expenses includes all normal operating expenses on which you do not get terms . As a rule , the only costs you exclude will be your cost of goods sold , since businesses typically get terms of 30-plus days .
Hitting the core capital target is one of the most rewarding accomplishments we have seen our clients achieve . It changes their thinking and improves their profitability . They are not so cash-strapped that they have to give away margin , and it gives them staying power through a bad quarter . Most of them never want to see line-of-credit debt again .
Force No . 4 : Harvest Profits By Paying Dividends
Once you have set aside taxes , paid off your line of credit , and met your core capital target , you can safely take your after-tax profits in the form of a distribution or bonuses to employees . You have now created a profitable , cash flow-generating business — the best of both worlds . The company is more valuable than less profitable peers . You own a wonderful , high-performing asset that you may want to consider holding onto rather than selling .
Here is the often-overlooked nugget in all of this : If you run a business at 10 % profit that has hit its core capital target , you now have a business that is producing a minimum return on equity of 50 % per year ! Investors would kill for a rate of return of 20 % year after year , and yours is running somewhere between 50 %– 100 % per year . This is the true secret of building wealth within a privately held business .
The key is getting a better handle on a few crucial ratios and adjusting your numbers to get a better picture of your true profitability . n
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