(0:00) That's why finance and strategy have to be interwoven.

(0:04) How bad would it be to see your business grow

(0:06) and hire new employees and expand operations

(0:09) only to go bust?

(0:11) This is Business Strategy, where I help the ambitious

(0:13) to build more profitable, iconic companies

(0:15) using the principles I've learned

(0:17) while growing and turning around

(0:18) million and billion dollar companies

(0:20) through Coltivar.com.

(0:21) I hope you share and enjoy.

(0:24) What makes a great company?

(0:27) I wanna hear your thoughts on this,

(0:28) so be sure to leave your comments

(0:29) or you could always reach out at Coltivar.com

(0:32) because when it comes to building a great company,

(0:35) this is what I believe from my experience.

(0:37) You can have a great culture.

(0:40) You can have a great team.

(0:41) You can have a great mission or purpose.

(0:44) All that stuff is important, but guess what?

(0:46) At the end of the day,

(0:48) if your company doesn't produce cashflow,

(0:51) it's not gonna be around for the long term.

(0:54) Sure, you may be a tech company.

(0:56) Sure, you may be a startup business.

(0:57) You just raised a bunch of capital

(0:59) and it's like, wow, congratulations.

(1:01) We're so excited because investors

(1:03) just gave us a bunch of, quote, debt.

(1:05) And you can use this money to go drive growth,

(1:09) get customers, get likes, whatever the vanity metrics are

(1:12) that you may be pursuing, but at the end of the day,

(1:15) if your company does not produce cashflow,

(1:19) guess what?

(1:19) Your investors will grow impatient.

(1:21) You will dilute yourself to the point

(1:23) where your company's not even gonna be attractive

(1:25) running anymore because you have such a small sliver

(1:28) of ownership or you're just gonna fail to remain viable

(1:32) because you won't have the cashflow

(1:33) to cover the losses in your business.

(1:36) So it comes down to cashflow.

(1:38) So that's what I've been thinking about a lot lately,

(1:41) especially as I reflect on my life

(1:43) and I'm 45 years old and I'm like,

(1:45) okay, I want to be as impactful as I can

(1:49) out there in the world.

(1:50) I wanna help people and I wanna be more efficient

(1:52) at helping people.

(1:53) And during this self-reflection time,

(1:56) I just always kept coming back to cashflow

(1:59) because the businesses that struggled the most,

(2:02) like when I go into companies to turn them around,

(2:05) they're struggling because they don't have cashflow.

(2:08) Sure, they need a strong culture.

(2:11) Sure, they need to have a great brand

(2:13) and all these other things that contribute

(2:16) to the value of the business.

(2:18) But if the company doesn't have a strategy in place

(2:20) which allows it to operate in a way

(2:23) where it can produce cashflow at a rate

(2:26) that exceeds its cost of investment,

(2:29) its cost of capital, right?

(2:31) If it's not earning returns, in other words,

(2:33) on its investment that exceeds the cost of capital,

(2:37) the business will be destroying value.

(2:40) And it all comes down to cashflow.

(2:42) So think about every single asset out there,

(2:43) a stock, a piece of real estate,

(2:46) whatever it may be, a bond, it's all based on cashflow.

(2:52) That's where value is derived from.

(2:55) So I just don't wanna lose focus on that.

(2:58) And that's why today I'm excited to introduce

(3:00) this new book that I just wrote.

(3:03) It's called Cashflow.

(3:05) And guess what?

(3:05) You can get it for free at Coltivar.com.

(3:08) All you have to do is cover the shipping, right?

(3:10) I can't go into the hole even more

(3:12) by giving away this book.

(3:13) I'm already gonna cover the cost of printing

(3:16) because to me, it's not about making money on the book.

(3:20) It's more about educating people

(3:22) on how to build great companies

(3:25) that endure in tough economies

(3:27) and thrive in booming ones, right?

(3:30) So that's the name of the book.

(3:32) Like I said, you can get it for free at Coltivar.com.

(3:35) But that's what I wanted to talk about today is cashflow.

(3:38) I see so many CEOs and their teams

(3:42) get distracted by all these other things.

(3:46) They get so focused on revenue or growth.

(3:49) But if that growth is not producing a return

(3:51) on invested capital that exceeds the cost of capital,

(3:55) guess what?

(3:55) The growth is destructive.

(3:57) I've seen so many businesses try to grow faster

(4:01) than their returns on invested capital.

(4:03) And guess what?

(4:04) If they don't go out there and raise the necessary capital

(4:07) to cover this growth, this ineffective growth,

(4:11) they go bust.

(4:12) I was working with a business years ago

(4:15) and I built this model.

(4:16) It's a pretty cool financial model, not to brag.

(4:18) And I'd only say that it's a cool model

(4:20) because I'm a nerd.

(4:21) Who else is gonna talk about a financial model like that

(4:24) but me?

(4:25) But no, I built this financial model and it's really cool.

(4:28) And I sat down with the CEO

(4:29) and he had some pretty ambitious plans to grow the business.

(4:32) And when I showed him that his percentage of growth

(4:35) exceeded his cost of capital

(4:37) and how that would constrain the business,

(4:40) like his eyes got really big and they opened up.

(4:43) And he realized that without combining a strategy

(4:47) back to finance,

(4:48) he could have easily made his business go bust.

(4:51) So let me explain.

(4:52) Your return on invested capital times one

(4:55) minus your payout ratio.

(4:58) And your payout ratio is essentially

(5:00) how much are you taking in distributions and dividends

(5:04) divided by your net operating profit after tax.

(5:06) That ratio of what you're taking out of the business

(5:09) will tell you how fast you can grow.

(5:13) So let's just say that your return on invested capital

(5:17) is 15% and your payout ratio is 10%,

(5:22) meaning you pay out 10% of your profits.

(5:25) Well, if you just plug in that formula,

(5:27) return on invested capital, 15% times one

(5:31) minus that 10%, that payout ratio,

(5:33) that gives you 90%.

(5:35) So 15% times 90% is 13.5%.

(5:39) I know it's a lot of math there,

(5:40) especially over a podcast,

(5:42) but the point is is that 13.5% is your max growth rate

(5:47) without raising additional capital, okay?

(5:52) And that's really critical to understand

(5:54) and it ties back to cashflow

(5:55) because if you try to grow at 30%

(5:57) and you don't have other sources of capital,

(6:00) you will grow yourself out of business.

(6:02) And that would be terrible, right?

(6:04) Like how bad would it be to see your business grow

(6:07) and hire new employees and expand operations

(6:10) only to go bust?

(6:12) So I don't want that to happen to you.

(6:13) That's why finance and strategy have to be interwoven.

(6:17) And like I said, I'm excited about this book, right?

(6:20) There's nothing in it for me

(6:21) because I'm giving it away for free right now

(6:24) as of the recording of this episode.

(6:26) So if you go to coltivar.com, you can get it for free.

(6:28) Like I said, you just have to cover the shipping cost,

(6:31) the handling, right?

(6:32) Now, if you're listening to this later on

(6:34) and you go to the website and it's no longer free,

(6:38) well, like I may change my mind in the future.

(6:40) But right now, this is the offer.

(6:42) And later on, yeah, if it goes away,

(6:45) hey, sorry, that's your loss.

(6:46) No, I'm just kidding.

(6:48) No, but seriously, now's the time to get it.

(6:49) I want you to be successful in your company.

(6:51) So be sure to check it out.

(6:52) It's an easy read.

(6:53) I even have some hand-drawn pictures

(6:55) that will entertain you

(6:57) and will prove why I didn't become an artist instead,

(7:01) why I should stick to finance.

(7:02) Anyways, I hope you enjoy the reading

(7:05) and thanks for joining me for this episode.

(7:07) And until next time, take care of yourself.

(7:09) Cheers.