You are the largest investor in your own business, so it’s only fitting that you think of your business from an investor’s perspective.
When you invest, you look to get paid back in two ways, through some combination of interest and principal. On the stock market, when you buy stocks low and sell high, you’re making a profit off the growth of that asset. That’s called asset appreciation. You could also call it a growth in principal or equity.
When the stock issues dividends, that’s the interest component of your investment. With other investments, like real estate, people might draw a flow of funds from charging rent. These investments are said to be cash flow. (Again, with real estate, asset appreciation is realized when the property is sold).
These are just a few examples of principal and interest returns from investments. The two types of return apply to your business, too, regardless of what type of business you own.
Most business owners aim to maintain a healthy cash flow out of their business, whether they do that by taking a salary as an employee or taking an owner draw. This cash flow pays for things like your mortgage, your car note, the grocery bill, etc.
Thinking about this cash flow is easy. Unfortunately, many business owners don’t focus as much on growing the equity within their company.
Every business has its own lifecycle. A business is launched, it runs for a number of years – or even generations – and it ends. A successful exit comes from selling your company and capturing the equity that you’ve grown. A well-run company is worth more as a whole than the sum of its parts. It will take time to plan your exit and prepare your company for sale; think at least two or three years ahead.
Understanding the two ways your business pays you back is key to making better decisions with your most important investment.
In my upcoming blog posts, I will be sharing a model of how businesses operate to generate cash flow and grow equity.