Scaling Up: How a Few Companies Make It...and Why the Rest Don't (Rockefeller Habits 2.0)

by Verne Harnish

Force #4: Harvest Profits by Paying Dividends Once you have set aside taxes, paid off your line of credit, and met your core capital target, you can safely take your after-tax profits in the form of a distribution or bonuses to employees. You have now created a profitable, cash-flow-generating business — the best of both worlds. The company is more valuable than less profitable peers. You own a wonderful, high-performing asset that you may want to consider holding on to rather than selling.

Here is the often-overlooked nugget in all of this: If you run a business at 10% profit that has hit its core capital target, you now have a business that is producing a MINIMUM return on equity of 50% PER YEAR! Investors would kill for a rate of return of 20% year after year, and yours is running somewhere between 50% and 100% per year. This is the true secret of building wealth within a privately held business.

Nothing ages a company’s leadership faster than being short of cash!

Profit vs. Cash What is more important, profit or cash? If you’re a growing business, it’s cash. This is why Amazon has continued to thrive while at near breakeven or, frequently, while posting losses. Amazon’s business model generates significant cash — more than $3 billion in 2013 — which, in turn, fuels its rapid growth.

What Is Cash Flow?

The only indisputable facts in any set of financials are the numbers that relate to cash.

Measuring Financial Success

Operating cash flow reflects the impact of movements in your working capital on your earnings before interest, taxes, depreciation, and amortization (EBITDA) over a certain period.

Bankers use this measure to calculate your debt service capacity.

You should be using it as your means to increase cash for growth, distributions, and other advantages that a ...

Have your extended management team (and employees) read the book. This will give everyone a common language and context for implementation. Then complete a complimentary 4 Decisions Assessment and decide which of the four elements — People, Strategy, Execution, or Cash — to pursue first. Go to that section of the book, and focus on reading and implementing the advice from one chapter per month for the next quarter. The assessment and bulk discounts on books are available at scalingup.com.

Form a weekly “council.” In addition to organizing a weekly management meeting, assemble a few key leaders to discuss strategies and the bigger opportunities and challenges facing the company. Go to Pages 108-109 to review the details of this crucial weekly “talk time” routine. Focus on completing the 7 Strata of Strategy worksheet; assembling a list of influencers; and working through the 4Ps or 4Es of marketing.

Launch a Quarterly Theme. Choose a measurable goal that addresses some choke point in the business (something keeping you awake at ni...

achieving it in the next few weeks. There’s no need for a fancy theme if you’re short on time. Put up a whiteboard in a common area of the company, and start tracking progress via the daily huddle. Then host a celebration at the end. Pick a goal ...

Start the daily huddle. Begin by holding a daily huddle for the executive team. Then, when these leaders are comfortable with the routine, let them implement it with their respective teams, cascading this crucial communication rhythm down through the organization. Share specifics, but don’t fall into th...

Plan your first quarterly or annual offsite. Set the dates for your next strategic planning session, and start preparing surveys of employees and customers. Also have middle management complete a SWOT and have the top leadership team complete the SWT. Once at the offsite, start filling in the boxes of the various one-page Growth Tools. Focus initially on the basic decisions represented on the Vision Summary worksheet (Core Values, Purpose, Brand Pro...

“Over the years, you have seen many business leaders succeed and fail. Have you noticed anything specific about those who made it to greatness?” Verne’s answer to that question is the same today. Success belongs to those who have these two attributes: • An insatiable desire to learn • An unquenchable bias for action

Those who win are constantly looking for better ways to do things and to improve. They don’t sit back and let others pass them by. They use their tools and resources to attack issues and make things happen.