Many small businesses that I’ve worked with over the last three decades had cash flow problems. They’re behind on their bills and late on their taxes. And on their end of year profit reports, they are usually asking me “But, where’s the money?!”

I recently picked up the book “Profit First”, written by Mike Michalowicz, and highly recommend it for any entrepreneur. He writes that of roughly 28 million small businesses in the US, defined as having fewer than 20 employees, that 22 million of them are just breaking even.

Simply translated, that means that only 29% of small businesses are profitable. Petrifying!

He believes that the cause of this isn’t a lack of cash flow, but a lack of cash management.

The Formula: Income-Expenses = Profit

It seems like a logical formula, but it has a perfect trap for failure laid into it.

What often happens is the company has a good month/quarter, there’s money in the account, and all of a sudden it’s time to purchase that new piece of equipment, software, etc. – you can easily fill in the blank.

The truth is we start a business because we are excited about a product or service. And most small business owners I know are incredibly proud of the quality of that product or service. They usually deliver more than what the customer expects and are deservedly proud of that.

But they also want to make some profit.

Luckily, there’s usually a simple reason for no profit. When there is money in the account it gets spent on upgrades to the product, service or facility. Usually profit goes to everything except giving the employees bonuses and paying the owner.

C. Northcote Parkinson developed a theory in 1955 that demand expands to meet the supply. For example: work expands to fit the time allotted to complete the task, bureaucracies expand to spend all the budget, etc.

How this relates to a business is very simple:

If there’s money in the checkbook somebody is going to spend it.

So, what’s the solution? It is simple and you might not want to hear it.

A business owner must change the way they manage cash in order to have a profitable business. To that end, here’s a new formula for successful cash flow management.

Income-Profit = Expenses

This new pattern is very simple. The money comes into the checkbook and a percentage of profit is put into another account immediately! This includes money to pay taxes and owner’s pay. Now the company is run on what is left. The profit account is not raided, except to cover the expenses it is designated for.

This forces the organization to run efficiently, and get more creative, as to how to lower expenses while still providing the customer a quality service or product.

Let’s take this out of the realm of business and apply it to life. My first trip on my own was Spring Break at Daytona Beach with some good friends. We were young, and had limited funds, so we got creative. We economized but still had a blast!

This change of thinking will permeate the entire business and force everyone to be more creative in producing the product and service. It will also leave the owner feeling much less stressed, much more profitable and among the top 29% of small businesses in the U.S. in profit.

In closing, buy the book and read it! You deserve to be rewarded for the hard work and risk that you experience in your business every day.

Greg is an internationally recognized entrepreneur, lecturer and mentor that specializes in helping small business owners reach the maximum potential for their business. He’s lectured to and worked with business owners in ten countries across three continents and built several successful small businesses himself. Contact Greg: [email protected].

A recent survey of Tampa Bay CEOs revealed that their main business concern revolved around human capital.  Business owners in multiple industries were surveyed and this is always their number one problem.  It’s still prevalent now.  It was even my parents’ main complaint when I was growing up as they ran our family-owned restaurant.  This really is a decades-old problem that has yet to be solved.

Many hours are spent by senior executives putting together what they believe will be great bonus and benefit packages.  Often, a significant amount of resources are spent on recruitment agencies or developing the “right” interview practices. Sound familiar?

Let me share something with you that I’ve always done, and the results that I’ve found, in my own companies.

The first thing I focus on is: What is the basic purpose of this organization?  Who does it help?  What problem does it solve for people?

To that end, I have developed a formula that I always apply in order to help focus my efforts on the right things:

• The Basic Purpose of this company is to help, who?
• Who live in?
• To achieve, what?
• By providing, what?

Those answers should be what gets the CEO, and executives, out of bed in the morning and excited about going to work.

Once this is established recruiting is a piece of cake. I just sit down with the prospect and go through an interview process that I choose; but that interview process is just a formality.  The entire point of the interview is to lay out my basic purpose and watch the potential hire’s reaction.

Here’s the key:

I need to see a positive emotional reaction to my basic purpose.  They need to agree with it, and get excited about it, before we can even begin to talk money.

Believe it or not, I’m either sold or pass on them in a matter of minutes. That’s really all it takes to give the prospect a chance.

In my experience, people who are dedicated to my cause will work harder and longer to help.  They complain less, come up with creative ideas that are much better than mine and are dedicated self-starters.  That is priceless.  It can’t be bought.

If the focus of the interview turns towards benefits and bonuses over the basic purpose of the company, I lose interest.  Of course, those things need to be discussed and are important; but I’ve hired many leaders who actually forgot what their pay and benefits were.

They took the job because they were excited about working for a purpose and not just the pay.

I want everyone in the company to know exactly how their job helps us achieve our basic purpose.  The higher they want to move up the executive ladder, the more dedicated they must be to helping our end users solve their problems.

That being said, I never try to compete by having the lowest price for the service that I’m offering.  I want to be at the upper range, if not the most expensive, in my industry.  This way there is more revenue to provide unmatched customer service and unmatched benefits and bonus packages for my employees. Simply put I don’t sell my services cheap, and I’m not cheap with my team. That way my clients get the best I can provide in exchange for their money.

To sum it up, I’ve found that the employee that holds “benefits and bonuses” higher than my company’s basic purpose can easily be stolen by a competitor.

Dedication to my basic purpose is priceless and eternal.

These people are out there and can be found.  Simply clarify your basic purpose and go find them.

Greg Winteregg is an internationally recognized entrepreneur, lecturer and mentor that specializes in helping small business owners reach the maximum potential for their business. He’s lectured to, and worked with, business owners in ten countries – across three continents – and built several successful, small businesses himself.