The virtuous circle of improving cash flow by Dallas Romanowski
If money is king, then cash flow is the kingmaker.
Cash flow can have a multiplier effect in reaching your planning goals for a prosperous future. Often times, increasing cash flow requires strong performance from key employees. Let’s look at how well motivating your key employees could have a cascading effect that creates a virtuous cycle of increased cash flow.
Marie, Marie, not so contrary
For years, Mary Kowolski’s custom garden growing formula business has been on an upward trajectory. But recently, she noticed that the cash flow had stabilized, just as she was starting to think about planning for retirement. She didn’t know why.
At her year-end annual meeting with her team of advisors, she raised her concerns. Her advisers noticed that she didn’t create an incentive plan for her top producer, Margo. She paid Margo well, but her advisors believed that with a motivational incentive plan, Margo could help Mary’s business start growing cash flow again.
They helped Mary create a written and realistic incentive plan for Margo that focused on improving cash flow. Mary presented Margo with a cash flow increase target of $ 300,000 the following year. If Margo could achieve this goal, she would receive a bonus of $ 100,000, a portion of which would be paid immediately, and the balance would vest over the next five years. The plan called for this pattern to be repeated in subsequent years, with goals for each year set in advance.
Over the next year, Margo was able to increase the company’s cash flow by $ 300,000. Her hard work qualified her for her bonus and was more than enough to comfortably reject job offers from other companies. She was ready to hit her goals for the next year.
Mary saw two direct effects of Margo’s hard work. That first was more money in his pocket. Mary took $ 50,000 from the increased cash flow and used it to supplement her personal investments.
The second was that Mary had more money to reinvest in the business. She took the remaining $ 150,000 and invested it in the company’s R&D. The investment provided better testing equipment, which allowed her team of scientists to further optimize Mary’s original formula.
The new formula was twice as effective at growing certain crops that tended to struggle in Mary’s stifling climate. It also sparked the interest of several regional producers, which expanded Mary’s customer base, generating more regular business even during the off-season.
Over the next five years, Mary and her advisors created a similar incentive plan for Margo each year, with higher cash flow targets leading to higher bonuses and earned benefits.
As her business success worsened, Mary continued to divide the additional cash flow between investing in her business’ management and R&D teams, and her personal financial strategies. This allowed it to hire strong COOs, which gave it more time to find and capitalize on its competitive advantages in its market.
As it approaches the fifth year of its cash flow improvement strategy, it has achieved three things.
- The value of his business had increased by a multiple of the new increased and repeated cash flow.
- Mary hadn’t given up anything to pay Margo’s bonuses – Margo made the effort and created the cash flow that was then returned to her in part as rewards from the incentive plan.
- The increased cash flow had allowed the company to invest in things which, in turn, would allow them to further increase their cash flow.
Increases in cash flow can get worse
Even modest increases in cash flow can have far-reaching effects. Whether you use these increases to improve business processes, hire more high-quality managers, or invest in your personal goals for the future, creating an executable strategy that generates cash flow is critical to your success.
In Mary’s case, the increase in cash flow started with setting up an appropriate incentive plan for her top performing key employee. With proper implementation, this incentive plan sparked other notable changes.
Her key employee achieved lofty goals and received an appropriate award for it, keeping her on board for the long haul. This allowed Mary to take the remaining money and invest it in other important areas. This multiplier effect continued through careful planning and processes, positioning Mary to leave her business on her terms.
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Chip Mayo and Dallas romanowski
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The Cornerstone team includes former C-level executives, successful entrepreneurs and advisors who offer unparalleled experience in delivering advanced, personalized and results-driven solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s exit planning content and tools. We have developed the Performance Culture System ™ to help clients implement best practices and drive high performance across their organization. For more information visit www.launchgrowexit.com, call (910) 681-1420 or send an email [email protected]