What Do You Want In A Business Of Your Own?

By | July 6, 2020

You could say that I am a business owner. I have my own corporation that does technology consulting for other companies. There is a problem with it though: I am my only employee. I trade my time for money. It is not the ideal business. So what is an ideal business and how do we apply these principles to investing in stock?

The Business Is Profitable

Let’s get a little ahead of ourselves, and I’ll tell you why in a minute. Without profit, or at least without the prospect of profit, a business is what you call a non-profit. Non profits are usually charities. Without profit, we cannot pay ourselves, we are just giving our time away. With negative profit (i.e. loss) we have cash flow that could lead us into bankruptcy. So profit is kind of important.

Businesses Don’t Usually Start Profitable

If you can start a business that is profitable right off the bat, awesome! However, most businesses require a couple of negative years (or even more) to get started. The point is to start a business that starts with a loss but grows profitable.

If you think about it, this makes sense. Sales is usually required for revenue in a business. As time goes on, sales is retained from one season to the next, as long as the business is creating a quality product. This also includes services.

A Good Business Will Grow Revenue, And Eventually Profit

Without revenue growth, a business we start will probably never show a profit… which, say it with me, is a non-profit. Once we achieve profit, the business should show good profit growth from year to year. That would be my preference anyway.

Sometimes, as in my case, there are limits to how much revenue you can generate. Luckily I show a pretty good profit in good years.

A Good Business Will Avoid Debt

The whole idea of starting a business is to be cash flow positive. Positive cash flow usually negates the need for debt… unless… you need money for growth and cannot acquire equity investments. Or if you need to buy a building or equipment or something. The business should live with as little debt as possible and pay off what it has as soon as possible.

A Good Business Will Have Plenty Of Cash

To avoid debt and to live through the bad times, the business should be able to generate and hold plenty of cash. Scraping bottom is not a good position for a business to be in.

A Good Business Will Be Worth Your Initial Investment

A business is usually started with an investment from the owner, you. The business should be able to return, in time, enough to make that investment worth it. Specifically, you should make more than you could from other investments, in theory.

A Good Business Is Not Always A Good Business

Here’s the thing: As an entrepreneur (i.e. person who starts a business), you try to make good choices. But young (early) entrepreneurs often make less than perfect choices. Maybe the business is not right. Maybe the overhead is just not worth it. Maybe you just make a left turn when you should have made a right. 90% of newly started businesses fail.

Which is why entrepreneurs have to be resilient. You fall down and get your face smashed… well you just found one way not to start a business. Get up and friggin’ do it again. Do it until you are successful. But learn your lessons along the way or you never will.

How Do We Apply These Lessons To Stock Investing?

A stock is a portion of a business. We want to buy a business that is either profitable or has really good revenue growth so that it will eventually be profitable. If profitable, we want good profit growth. We want a business with a good balance sheet of a good amount of cash and little to no debt. We want the price we are paying for the stock to be worth it. All of this has to do with the company’s financials.

In addition, if you make a bad choice, you don’t want your entire investment to be lost. That is why we invest in several (i.e. 10) companies. If one is bad, at least we have 9 others. We also want to keep up with the news (especially financials) about our companies as maybe we can react to problems before others do.

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Do you have a relevant article you would like us to link to? Feel free to make a request at brian@satterleegroup.com.

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