BUSINESS MUST MAKE MONEY

As a financial consultant, I have encountered people who say that they want to go into business, but don’t want to make too much money. This may sound absurd but true. Some people feel guilty when they make too much money. This attitude can elicit praise from people who are looking for altruism which is rare, but plain and simple, this attitude is unacceptable in the business world. Business must make money. Money is like oxygen flowing into the lungs, feeding every vital organ of the body. Even non- profit organizations must make money or they die.

One of the measures of how good the business is, is return on investment (ROI). This is expressed as a percentage of the capital invested. It is annual income divided by the amount invested, expressed as a percentage. The ROI must be greater than the return on capital invested in a safe investment, e.g. bank instruments. Otherwise, the businessman is better of investing his money in a safe bank instrument instead of worrying about managing the business. Another measure involves determining how long before the invested capital is recovered (Payback period). If these indicators are good, investors are attracted to the business.

However, these indicators must be gauged in relation to the industry where the business operates. But within an industry, variances will depend on how well the business is managed. There are different parameters for each industry. For example, if the business is in a space which can be quickly disrupted or outrun by innovation, such as in a technology business, capital recovery must be fast and investors must be able to quickly make money after capital recovery so that they will have the money to innovate. As new entrants eat into the market, the business may start to decline. For example, if you put up a restaurant with a new concept, the first year might be rewarding, but succeeding years might not be so. Initial years might see customers trying out your new concept but new entrants will be worth trying too. In the restaurant business, a payback period of two years or less is ideal. To minimize risk, expect less customers on the third year and work around that assumption. On the other hand, if the business is a monopoly, such as power supply in a given territory and is protected by a franchise agreement, you can tolerate a gradual but steady recovery period where cash dividends will keep on flowing into investor’s pockets over many decades. The same thing goes for apartment rental.

If customers keep on buying, it means they are satisfied with the product. If your cash do not keep on flowing, your sourcing or production and delivery are affected. Any vacuum in the market will be taken advantage of by competitors. Your customers will think you are unreliable and will shift to other more reliable sources. This cycle, producing efficiently, holding just enough inventory, delivering to customers at the fastest and least cost and getting paid within the shortest time possible, must be managed well to generate cash that flows like oxygen to the body. The more excess cash the business produces in this cycle, the more money the business will have to pay and give incentives to its employees, distribute to its investors and pay its creditors, or fund expansion and innovation. If not enough money is generated in the cycle, it may mean the business is losing and on its path to decline.

A good manager understands his cash cycle and watches his cash flow. A good businessman knows how to build his organization to attain this objective. Everything about the business affects the flow of cash. A businessman is in business to make money, which is his reward for being a good steward. Can you think of a situation where you are in a marathon and after winning, you go home without being given a medal to acknowledge your victory? There is a great feeling when we are rewarded. It validates our good management and are motivated to work. It helps us get to the next level.

Losing money cannot be classified under charity. Making more money from one’s business and giving to charity are two separate activities. After the businessman’s good management which produces money, he can give more (note: his money, not the money the business needs) to charity or worthy causes. We are stewards. As a matter of fact, after this life, nobody brings material wealth with him. This fact reminds us that we are assigned as stewards and should be concerned not only with our pockets but with other non-monetary aspects of the business, such as its benefit to the community.