directorships are okay if modestly paid).
Therefore, you can stay focused on what is best for SHAREHOLDERS – and put their interests first.
Lastly, if shareholders are not receiving a dividend of any kind and the business is growing, then the shareholders would be advised to sell. It would be wise to include such an option in any shareholder agreement whereby the shareholders can sell their stakes to anyone of their choice without offering tag-along rights (that is, ensuring that they can sell their own shares without regard to other shareholders – Rule 91) if they don’t receive dividends of at least 5% of
turnover. This option will greatly help motivate a management to pay dividends and therefore ensure that shareholders are also rewarded as well as the
management team (who will typically hold fewer shares but earn large salaries).
17. Use the dividend cash flow to value your business
Valuing a business is, contrary to most opinions, very easy.
The value of your business is the amount of money that your business can pay out as a shareholder dividend for as long as the business can pay it out. So, if your business pays out a total of £500 in shareholder dividends every year for ten years and then collapses, the business is worth £5000 – okay, with some minor adjustments for inflation.
There you go, we’ve just shown that great and complex ideas can be expressed simply.
Hopefully we’ve also highlighted, again, how important steady dividends are?
Make that 20 years of dividend instead of ten and suddenly the business is worth twice as much for the same annual dividend.
Remember, dividends are paid out of a business’s profit – where some of the profit is kept back to be reinvested in the business (more on that later).
18. Focus on cash-flow forecasts
What is hard in business forecasting is figuring out what your future cash flow will be. It is much easier to forecast sales volumes, so this is how we should start to work out our cash flow.
Using industry-standard profit margins as your base, you can begin to forecast cash flow. For example:
If you are forecasting a sales volume of £100,000, and the industry-standard profit margin is 10%, then your forecast costs will be £90,000.
Now work out if your costs fall before, after or at the point of banking your sales revenue; and what they are; and then you will have a decent cash-flow forecast.
Of course, you will be told (or it will be tempting to tell yourself) that if you had more revenue you could make more profit – but don’t fall for this beguiling line.
A sudden rush of sales volume can easily take place if we let go of the profit margin, as we saw earlier.
Therefore, stick to the principle that profit margin comes first, and with the expectation that your CEO (or yourself) will achieve at least the industry- standard profit margin then you can ask what sales you can achieve.
With the knowledge of sales volume and profit margin, you can now calculate your dividend, and from this your business value (see Rule 17).
19. Check your bank balance daily
Your cash position is so important that you should look at your bank account daily – or, if you have more than one account, ask your finance team to give you a simple figure. How much cash is in the account(s)?
Now, to make this a useful figure, ask your accounts to give you the same figure from one year ago and how much it has gone up (or down).
This very simple rule will give you plenty of insight into the performance of your business.
20. Don’t do guilt
Yes, lots of people will try to make you feel guilty about profit and, yes, this is why we often pretend that the business isn’t there to make a profit.
Look, we know this is rubbish – so let’s just not accept the guilt. We know that everything in the business ultimately depends on profit (or, as we saw earlier, profit margin). If team members want exciting jobs and career advancement, they will only come about if we make profit and hold strong profit margins. The more we make and the bigger the margin, the more exciting it will be.
And, as for your rewards as the founder, remember (as earlier) that all the risk in starting the business was, by and large, yours. So what you do with the money is your choice – spend it, save it or give it away if you like – but don’t feel guilty about it.
Earn your profit, take your profit, declare your profit and then, if you choose, put it to good work building new businesses or donate it to someone who can make a bigger difference with it than you can.
But please, we don’t have time for guilt.
21. Beg, borrow and barter
If you follow the old advice to never borrow, then you will have limited or perhaps no cash available.
So, begin your enterprise by begging, borrowing or bartering. That is, if you can’t persuade someone to give you what you need for free, then see if they will loan it to you – perhaps for some share of upside – or offer to provide a useful service to them in return.
Perhaps you can offer some free promotion in return for office space, advice or help with the accounts? More ambitiously, if you cannot pay for your accounts, why don’t you offer to introduce four new clients to your accountant for free instead?
Of course, it’s important that you can deliver at least one paying customer up- front, as this will immediately establish your credibility. And given that your accountant, like all businesses, will spend between 10 and 50% of their income on marketing to reach new and existing customers, your offer may be very welcome. If you can deliver four new clients to them per year, then the chances are that the value of the saving on marketing and finding those new clients each year will be equivalent to the cost of providing you with the same service for the whole year.
22. Use win/win negotiation
Young entrepreneurs sometimes interpret the advice to beg, borrow or barter as a recommendation to try to get everything for free and offer nothing in return. This is a very bad approach.
Instead, in this as in all your business negotiations, you must seek to understand what the other person wants. It should be, for want of a less cheesy name,
win/win negotiation.
And it should be applied not only in the begging-borrowing-bartering phase of start-up, but always – to relations with your staff, discussions with your
suppliers, and so on (everyone, in short). This doesn’t mean surrendering your own objectives, but rather understanding the simple function of human nature, often overlooked: that it is much easier to get your way if you are helping others get their way at the same time.