This is the first episode in the Solid Business Foundations series.
Right-Size your company is about having a strong business foundation with the free cash-flow to cover all the business expenses, not just day-to-day operations. The trick to right sizing is adjusting revenues to match expenses, not matching expenses to revenues. Included are three dangerous cases when company’s revenues can get out of balance with expense and the revenue first approach to make the decision to up-size or down-size.
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Right-sizing is about having a strong business foundation with the free cash-flow to cover all the business expenses, not just day-to-day operations.
A key point in right-sizing a company: it’s about revenues, not expenses. The trick to right sizing is adjusting revenues to match expenses, not matching expenses to revenues. Focusing on revenues keeps you focused on providing value to the customers that give you money–working towards a solution. Focusing on expenses leads to spreadsheet management methods – working towards a number, an answer.
A business has 4 main activities to be successful at: operations, financing, tax, and owners getting paid.
Simple Definition of Free Cash Flow
Free cash-flow is revenues minus the total expenses from operations, taxes, financing costs, and owner payouts.
Three Cases where Business Owners get in to Trouble
- Young company past the break-even mark. Operations is cash-flow positive, but can’t pay back loans, investors, or pay the owners.
- Economic storms that disrupts revenue.
- The business owner who just gets tired of working 80+ hours a week and rather than hire managers, the owner reduces the size of the company to a size and time effort that can be managed by the owner.
Right-sizing your Company is about revenues, not expenses
- Attempt to get revenue in harmony with all business activity expenses.
- Revenue has the very basic equation of widgets sold times the price. Customers buy X things for Y dollars..
- If you need to grow, to up-size to the right-size, start with the question: What does it take to build more?
- If you need to shrink, to down-size to the right-size, start with the question: What does it take to build less?