I recently wrote about, “How to Get Rich” by Felix Dennis in this post, where I share how life changing this book was for me. This book led to several important decisions in my life.
Well, there is just so much in this book, I thought I would write another post. In the chapter titled, “The Five Most Common Start-Up Errors”, I recommend studying Error #2 regarding cashflow. Dennis writes:
“Isn’t cashflow a bean-counter topic? The concern of accountants?
The answer is that lack of cashflow will eventually doom any enterprise. All new ventures (and established ones, too, come to that) require positive cashflow if they are to grow and to succeed. Cash is a serious matter. Its management is utterly vital in any enterprise…
As far as cashflow is concerned, I have little to learn from any qualified accountant. Cashflow is something that any enterprenuer must fully comprehend from the get-go. Balance sheets are a matter for accountants, banks and auditors. But cashflow is the heartbeat of your company. If cashflow is good, then no matter how badly run or poorly managed a company is, there is always a decent chance of turning its fortunes around. At the very least there is enough time to be able to do so. But if the business’s cashflow is weak or failing, then the chances are that it must shut down or be sold in the not-too-distant future and its assets disposed to satisfy creditors.”
Felix Dennis, who built an estimated net worth of $400,000,000 to $900,000,000, suggests cashflow is the one thing we must pay very close attention to as it is the lifeblood of every business.
Lack of cashflow will doom any enterprise.
Excess cashflow can save a poorly run enterprise.
This is so important and few really understand the value of cashflow. I certainly didn’t when I started building businesses. It IS the most important aspect of any business.
“The main thing is to keep the main thing the main thing.” – Stephen Covey
Cashflow is THE main thing.
To be successful, we must KEEP cashflow as the MAIN THING.
I started my career as an accountant. Actually, a CPA, and I didn’t understand the value of cashflow until I started building businesses. As an accountant, I was taught to focus more on assets and liabilities – the balance sheet. The reason why is because the balance sheet highlights the equity in a business.
Assets – liabilities = equity
This is supposedly what the business is worth.
The problem is the value of assets, liabilities and equity has no real impact on a business. The same applies to us personally.
Equity cannot save a business with no cashflow.
Equity cannot save an investor with no cashflow.
I learned this valuable lesson during the 2008 market crash. My equity evaporated as the stock and real estate markets crashed.
Oddly enough, my cashflow kept flowing into the bank accounts. Cashflow saved me.
So here’s the question to ponder…
IF CASHFLOW IS SO DAMN IMPORTANT, WHY DON’T WE MAKE IT OUR ENTIRE FOCUS?
Why don’t we engineer everything we do around increasing cashflow?
It honestly don’t know. It seems like the most effective way to engineer the lifestyle we so desperately want.
The problem is we don’t actually follow Covey’s advice. We typically pursue multiple goals at the same time and in many cases these goals conflict with each other.
Consider these two goals:
1. Financial independence – enough investment income to offset your living expenses eliminating your need for work.
2. Build wealth – a multi-million dollar net worth.
These two goals seem to be inline with each other, don’t they? This is what I used to think and I believe this caused me a problem or two. Today I see these two goals as conflicting. Each goal leads to different actions.
If your goal is to achieve financial independence as quickly as possible….
Would you work 50 hours a week to make 15% contributions to your 401k plan?
Would you focus on saving $1,000,000 during your career so you could retire at 65?
Would you spend 20 years building a million dollar business?
Would you focus your investments on appreciating assets and wait decades for the appreciation to occur?
My guess is the answer to each question would probably be “NO!” These actions wouldn’t support the goal to achieve financial independence as quickly as possible. However, this is exactly what we do. We want financial independence, but we don’t make decisions leading to our goal. We pursue a conflicting goal instead.
We don’t keep the main thing the main thing.