Non-sexy businesses generate cash
Apr 26, 2012 / 5:00 am
Quick riches in business are sexy but elusive.
A non-sexy business generates steady cash and gets the flashy car and the girls.
The headlines in newspapers and magazines are full of the lucky and imaginative entrepreneurs who made a billion dollars with a bright idea for a new social media site or a coupon exchange site.
Why Instagram Was Worth $1 Billion to Facebook. Check it out, the company was in business for 555 days, sold an application to make it easier to share photographs in the internet and never made a profit.
Quick riches are sexy. Having an application that runs on millions of iPhones is sexy. Having a bestselling book or video game is sexy.
But the reality is that those businesses are few and far between.
What does Warren Buffett invest in these days: Proctor & Gamble, the soap makers; Kraft Foods who make boxed macaroni and cheese; Costco, the wholesaler; and Wells Fargo the mortgage company.
Why, because Buffett acknowledges the investment grade value of steady, unwavering payments year after year over decades without his direct intervention or having to push a sale personally.
The very rich and very old families made money from land. There were rent seekers who used an asset they wholly owned to generate generations of cash from rents. Only after rents declined when people moved off the land to the cities did they seek to maintain their lifestyle by borrowing.
Even today, investors are taking into account that land and buildings will NOT increase in value, so they look for projects that have “‘cash flow”.
How does this apply to small businesses and their owners?
A small business is an asset and a valuable asset if it produces cash every month and every year at a pre-determined rate.
This means that it must be:
- meaningfully profitable (40% ROI, perhaps),
- steadily profitable (structures in place to create a pre-determined profit), and
- not reliant on one person , the owner, to make things happen.
So if your little bucket manufacturing business is not exciting and sexy, don’t despair.
A waterfall of cash falling into your bank account very month is sexy too and if done properly will help you Build Your Business.
At Floodlight we help you Build Your Business using great, time-tested business tools.
This article is contributed by AndrewD. Gregson B.A., M.A. M.Sc.(Econ) – Floodlight Consultant
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