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The 5 Phases of Money Flow

Becoming "profitable" takes longer than you think. First you have to suffer a little.
Something that we have found in almost every business we work with is that it costs their owners almost twice as much and it takes them twice as long to make their businesses profitable.

The proof is in the business plans that we see when we work with our clients or when we consider a proximity investment. We had a similar revelation when we started Whitestone Partners , our consulting business. We thought that in a few months we would have enough clients to cover our expenses and pay us our salary.

However, it took us more than 2 years to earn what we did before.

These experiences made us think about the different stages of the flow of money. In fact, we've identified five money flow phases that businesses tend to go through as they grow.

Phase 1: Put your own money in the business
If you start a business from scratch, this is usually the phase where you start. Here you are not receiving money from the business, on the contrary, you are putting your own money in the company to pay operating expenses, buy capital, etc. For example, our business required us to invest in marketing and computer equipment while it did not receive capital.

We decided to make personal loans to our business to cover those expenses. We also had to pay our mortgages and other expenses. During this period we lived on our savings.

Phase 2: The business is not yet self-sufficient but does not spend money
After several months, many more than we had originally imagined, we reached the point where our business was generating enough to support itself, but still not supporting our personal expenses. We continued to pay those expenses from our savings. Unless you are rich, you will have to get through this phase quickly enough.

Staying here too long will end up draining your resources. Some entrepreneurs supplement this phase with part-time jobs or even working full-time while building their business. This strategy can help you pay off your mortgage, but you must be clear about the mindset of having one foot in your job and the other in your business. At some point you will have to commit to your thing.

Phase 3: The business already leaves some money while the owner continues to pay some expenses from his savings
After many months, our business was generating enough money to cover its own expenses and some of ours. However, we still did not have a fixed salary. What we did was repay the loans we had made to the business when we started.

You can charge your business a reasonable rate of interest. However, we will always recommend checking with your accountant when making the initial loans and when determining the return payment. At this point, they will still have to supplement their income with money from their savings. This is better, but they are not free yet. Sustainability and the ability to sleep long and deep will come to the next stage.

Phase 4: Personal and business expenses are paid out of the company's cash flow
We had a celebratory dinner when we finally managed to get a fixed salary from our business. That step took much longer than we had expected, but we realized that we survived. When you get to this stage, you are almost there. Your business is making enough money to allow you to pay your bills and support your lifestyle indefinitely.

However, if you stay at this point, unless you sell your business, you will not be creating wealth and retiring will always be a dream. You have to move to the point where your business generates a flow of capital that exceeds all expenses.

Phase 5: The Investing Stage
This is the ultimate goal. You want your business to generate so much money that it exceeds what you need to maintain your lifestyle; you want it to generate wealth for you. Sure you've been investing in your business all this time, but now you have fixed funds. Now you can choose how to put them to work.

You can choose to re-invest that money in growing your business more . And, in most cases, this is the best option. Alternatively, you can choose to diversify your investments. You can buy or start another company. You can invest in stocks or real estate. The options are almost limitless.

These are the 5 phases that entrepreneurs tend to go through as their business grows… We did it. How long it takes you to go from one phase to the next will depend on your business, the economy, and a host of other variables. In the case of our business, it took 3 years before we reached phase 5. Unfortunately, many businesses do not make it to phase 4 and fewer still make it to phase 5.

It is also possible to take a step back. For example, you may have been through phase 4 for many years, but if your business conditions change, you may find yourself using your savings again. The important thing is that you understand these 5 phases and that you have a clear plan to carry your business between each phase.

Make sure you have enough resources to survive the early stages of negative cash flow. Finally, as we said above, our experience is that starting a business takes twice as long and costs twice as much as you thought. Make sure you have adequate reserves to cover this extra.

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