As an entrepreneur, you will probably face a handful of major consistent dilemmas, but one of the most persistent and complex is the way you approach the value of your business. This boils down to a struggle between running your business to maximize cash—that is the money that you have in the bank each year—or to maximize equity—that is the overall value of the business entity.
These choices are very much at odds.
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Maximizing cash means that you may take on non-core clients because, well, they bring in more cash! It also means that you pinch every penny and may make decisions that payoff a little today, but don’t add value in the long-term. This includes forgoing investments in arenas like marketing and personnel that often require a cash burn before you see a return on the investment.
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The benefit to a cash maximization strategy is straightforward; you have more visibility and predictability of cash coming in, year after year.
The downside is substantial though. By focusing on cash and forgoing investments, big and small, you may limit the upside opportunity for your business.
Running your business to maximize equity requires an iron stomach. It requires more risk-taking but with the promise of more rewards. Because you are focused on building long-term value, you are laser-focused in your offerings of products and/or services, and you won’t take on non-core clients solely because they have cash ready to spend.
It requires not being cheap, too. It means that you invest in the best people, even when maybe you can’t technically afford them. It means dollars focused on sales and marketing and not watching every penny like a hawk. Certainly, it doesn’t mean you spend like there’s no tomorrow but it does require spending like you anticipate tomorrow is going to be big.
This can lead to less money available for you to pay yourself and can even require outside capital, whether that be equity or debt.
So, when do you make the shift in strategy? Like anything, it is part art and science.
If you have not set yourself up financially (for example, you have lots of personal debt, little or no savings and substantial rent or a mortgage due), it may be difficult for you to stay in the mindset required for equity maximization. So, work on paying down personal debt and getting yourself in position to have a few years of financial flexibility first. And note, by financial flexibility, I mean you can feed yourself ramen noodles, not four-star meals.
If you have some financial flexibility and you can get comfortable with the discomfort of being a risk taker, then really think about trying to pursue equity maximization for a few years, as it will take time (and always more time than you expect). If it pays off, you will have a much bigger business that should allow you to increase your return on investment by multiples of any cash return you would otherwise receive. The reality is that if you are taking on the risk of being self-employed, you might as well shoot for creating some serious value to the business and not just creating a job for yourself.
It’s a constant dilemma, but one that should be carefully considered, as the risks and rewards of pursuing cash vs. equity returns are substantially different.
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About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
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