You Can't Eat Promises



It doesn't matter how much potential your business or investment portfolio has if you don't have enough positive cash flow to hold it together.

Your life revolves around cash flow needs and those personal needs have to be met. Likewise your business or investment portfolio has certain needs that must also be met. If you don't have a strong positive cash flow then you are forced to be continually compromising in areas that should be strongly supported. This could substantially reduce you bottom line net profit.

You need to generate sufficient cash flow to allow the potential of your business to become a reality.

You Can't Eat Equity

Many investors and some business owners become overly focused on chasing equity at the expense of cash flow. This is particularly common in property investment.

If you buy properties that go up strongly in price but that have low rental yield then you have to regularly add money to the equation in order to make the loan repayments and meet the property expenses. If you keep adding similar properties to this portfolio it is a recipe for misery.

I have a friend who has a very high personal income from his profession but has bought so much poorly cash flowed property that all his money is going to keep his investments afloat. His capital growth is great and so on paper he is a multimillionaire but his cash flow is so poor that he lives like a bum.

Develop a Cash Flow Strategy and Follow It

Regardless of whether you are in business, whether you are a serious investor or whether you are just an ordinary person trying to make ends meet you need to develop a sound cash flow strategy and then stick to it.

Look at where you are currently generating your income. Look for ways to increase that income or other income sources that can be added to the equation. Look at your expenditure and see where you can improve this without sacrificing quality of life or quality of business outcomes.

Assess Your Cash Flow Outcomes of Every Decision

Whenever you make a business or investment decision ask yourself how that decision is going to change your cash flow both in the short term and the long term. If that decision is going to lead to a drain on your cash flow then you need to find a sensible way to balance out that drain or, failing that, look for alternate options that will not be cash flow draining.

Poor cash flow leads to pain and suffering for all concerned and therefore any decision that leads to poor cash flow is not a good decision. There is always another way to achieve your objectives and keep the cash flow strong at the same time. It just might take a bit more work to find it.

Distinguish Between Investment and Liability

Most people are totally amiss when it comes to distinguishing between investment and liability. Accountants tend to see all expenditure as liability and so miss out on good profit making opportunities. The naive investors tend to see all forms of capital growth as investment and so neglect to assess the cash flow consequences and thus make their life an unnecessary hardship.

Let's look at some simple definitions. An investment is anything that will lead to a net positive cash flow in the short term that can be sustained as a positive cash flow in the long term. A liability is anything that causes an uncomfortable cash flow drain in the short term or long term.

If you have good reason to adopt a strategy that will be a liability by the above definition then you need to include as part of that strategy something else that will balance out the cash flow drain.

For example, my property investing friend who is obsessed with chasing equity would be better served by buying a mixture of properties where some were highly cash flow positive (regardless of whether or not they had capital growth) so that they balanced out the cash flow needs of the high equity growth properties. By having this balanced approach his overall strategy becomes an investment rather than the liability it is now.