Every entrepreneur’s dream – owning a business, building an empire, enjoying sweet cash flow… and someday, cashing in bit time by selling your business.
If you were a serial entrepreneur, you’d do the above things over and over again, till you get bored :D
Ahh… the joy of entrepreneurship!
But wait – have you ever take a time to view your business from bird’s eye view? I mean – have you ever look your business as a whole, at a different perspective?
I have – and it’s not pretty. It’s beyond what I think an ideal world of entrepreneurship would be.
You see, you invest in machines, PCs, furnitures, and other fixtures and equipments to help you run a business, get customers come, and make profit.
Have you ever noticed that you invest so much on fixtures and equipments – that depreciates in value – that you are not actually building an asset but a liability?
Whoa, Nelly! Wait-a-minute! You are saying that my biz is not an asset, although it’s been profitable?
Err – yes and no.
Let’s have a simple what-if to make my point.
Suppose you own a company creating a widget. You invest $50,000 on fixtures and equipments. Your stuffs will be depreciated in 5 years time – That’s $10,000 a year depreciation, roughly.
Suppose you make $150,000 annual sales, with $20,000 in net profit – Your return on investment is in 2.5 years time. Nice and smooth, you think.
What’s wrong? It happens to be that you need to upgrade your equipment to make better widget, because the competition push you to do so.
Suddenly your net profit is plummeting.
You are suppose to upgrade to make more – but, alas, that’s not what always happen. You have to invest just to hold on. Not mentioning the rise of commodity price tags. And the rising gas prices. Ouch.
Then, the story goes on – the business is no longer performing well. Then you sell it on the book value, trying to change things – less than what it should value.
Not a happy day for the business owner.
In my humble opinion, stop investing in businesses that eat most of your investment just for the fixtures and equipments, unless you have strong financial backing and support.
My suggestion is to invest in a business that only 10-20% of projected annual sales is spent on fixtures and equipments. That way, you can budget more on marketing – the REAL tool to build REAL asset – customer and cash – land and building is a plus.
So, evaluate your business plan well, and don’t make the same mistakes that I did ;) I learn well and I hope you do, too.
Liquid asset is king