I want to share with you five things. If you get these five things right, then your business will pay dividends to you every single time. The third is keeping your ratio of direct costs to indirect costs very high.
We’ve discussed the importance of using other people’s money to invest in your company and keeping your fixed costs as low as possible. Now, here is the third thing you must do to have a cash-flow positive business.
3. Keep the ratio of direct costs to indirect costs very high.
In business you have many, many functions. A lot of you work at companies. It could be the accounting department, the human resources department, or the sales and marketing department.
There are many functions in a business, but only some of those functions are directly related to your sales.
Is the manufacturing department directly related to sales? Yes; they are actually producing the thing.
If you have a seminar business, is the person who teaches the course an indirect or a direct cost? That is a direct cost of getting and delivering the sale.
Are the sales people for it a direct cost or an indirect cost? They are a direct cost.
Everything else is indirect.
So the only people you want to be paying are the people doing the doing or doing the selling.
You want everyone either doing the doing or doing the selling!
You want to keep all the other costs infinitesimally small.
If you do that, do you think your company will make money? Think about it for a moment. All of your costs are going to selling and delivering. It is really hard to lose money.
If you have one salesperson and one delivery person and you have three people in accounting and four people in HR taking care of the two people that are doing the work, it won’t work. I wish I were joking, but I have seen companies just like that. I have seen a 20-person company that had seven layers of management. I was called in as a consultant for this company that had 20 employees and was saying “Who at the bottom of the pyramid is holding this thing up?” It didn’t take much to tip it over. If all of the people at the bottom are doing all the work, then they have the entire structure sitting on top of them.
It is a very simple principle.
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I want to share with you five things. If you get these five things right, then your business will pay dividends to you every single time. The second is keeping your fixed costs as low as possible.
