An excerpt from Parthiv Shah's upcoming book on Fiscal Fitness, available soon!
My first major business was a dot.com company. I built a system that was to be the foundation of a national network of dry cleaners. My partner and I created a data plan to tag every garment with an identification number; when garment #29305 was pressed eleventh time, the customer would get a coupon from the manufacturer to get the garment replaced. It was a good idea but unfortunately I did not know ANYTHING about dry cleaning.
I bought two dry cleaning stores; my business partner said that he would do all the cleaning at one store and he would send his sister to come help me run the other store. Everyday after the store closed, the first thing his sister would do was take the money from the cash register and count it into three separate piles. She explained to me that the first envelope she filled was her paycheck. The second envelope was the money to pay for the wholesale of washing the clothes. And, finally, the third envelope was the leftover money to pay the rest of the bills. She clearly had her personal priorities straight!
To her, her cost of breathing was her paycheck, then her brother’s wholesale and then the rest of the bills. What happens when you do that? There is not enough money. My partner and I constantly needed to write checks to the company because we did not have enough money to fund basic overhead costs.
That company never made enough money to fund its own cost of breathing. Every week from my paycheck and my savings account, I gave money to the company. There was always enough money to pay his sister’s paycheck but not enough money for the electricity bill. Eventually, I had to quit. I told my partner that I could not do this anymore and would have to sell the company. He agreed. The men who bought our stores said they would give us $15,000. I would get half and my partner would get half but...we had $4,000 in overdue rent and an unpaid wash bill. In the end, I walked out with approximately $3,000 and I went back to work at my old job. So, I am all too familiar with the dangers of not considering COB.
There is also another concept to consider and it is what I call “windfall.” Looking at the monthly commission that I receive from Infusionsoft and ClickFunnels. All my clients have Infusionsoft and all my clients have ClickFunnels. They all buy using my affiliate link so although it is essentially nickels, I am still receiving a consistent stream of money from commission. The oldest client from whom I am getting commission originally bought in 2010. Let’s say I receive around $20 for month from a client who bought Infusionsoft in 2010. When you multiply the $20 times the X number of Infusionsoft users and the Y number of ClickFunnels users, it adds up.
Hypothetically, I make a total of $5,000 in commission between Infusionsoft and ClickFunnels. The key question is what am I supposed to do with that money? Should that money go towards paying cost of breathing of eLaunchers? NO. If it does, then what I am doing is taking a windfall and burning it. Elaunchers’ current cash flow should have no accountability to a windfall that comes in as a passive revenue. Ideally, the commission should go directly into either a business savings account or you, as the business owner, can take it home. You can most certainly take the money home as ordinary income and pay taxes on it BUT don’t chew up the money.
Frankly, this happens a lot. People tend to waste when there is no cause-and-effect relationship between inbound money and how that money is spent. Take, for example, a law firm that when you discuss the actual success of their marketing or look at the actual profits of each department, many groups are in the red. The question then becomes how do they survive financially? Well, five years ago they won a major case and now they receive a substantial payout of $25,000 per year. The firm has to do absolutely nothing in order to get that money from which they are funding their cost of breathing. Technically, the owners of the firm could fire everyone, take the $25,000 and go on a cruise. The lack of accountability in funding cost of breathing is dangerous as it impacts motivation for profits.
All of this is critical to the survival and success of your company. Now what you need to know is how to keep track of the financial data in a way that will be most beneficial to you.