How to Scale a Business Without Running Out of Cash

Growth is great—until it drains your cash and puts your business at risk. In this video, Steve shares the one metric every business owner needs to know to scale sustainably without running out of money.

You’ll learn how to calculate your safe growth rate, spot early warning signs, and avoid the financial pitfalls that catch so many growing companies off guard. If you’re serious about scaling without stress, this insight could change everything.

TRANSCRIPT:

Growing and scaling a business is really fun until you run out of cash. So in this video, I’m going to walk you through the one metric you need to know, which will tell you exactly how fast your company can grow. So let’s go ahead and jump right in.

There is a metric that I love in business, and it’s ROIC. This stands for Return On Invested Capital. And the way you compute this is you take net operating profit after tax, which is NOPAT, and you divide that by invested capital.

Now, if you’re not a financial person and a nerd like me, don’t worry. I’m going to show you exactly where to find this information so you can compute this in your business and calculate exactly what your growth rate is. All right.

So for starters, NOPAT comes from your income statement. Your income statement will show you your revenue, your cost, and ultimately your profit. But what I want you to pull off the income statement is not the net income. I want you to look at your operating profit. All right. So you have operating profit here.

And the nuance for companies is that if you’re an LLC or you’re an S-corp in the United States, your business doesn’t pay taxes like a C-corp. Instead, this profit flows over here and it goes onto a K-1. And the individual owning the business or individuals, they pay taxes through their personal income tax return.

So how do you get to net operating profit after tax then? I just keep things simple and I just use 35%. Okay. So just take your 35%, 1 minus 35%. That’s your tax rate. And then that will tell you your NOPAT, your net operating profit after tax. We want to look at this number after tax, because if not, you’re tricking yourself and you’re going to skew the numbers because somebody has to pay the taxes, right? Fortunately or unfortunately.

All right. So we have NOPAT and we have invested capital. So where do we get invested capital from? Invested capital comes from the good old balance sheet. BS is not what it stands for. Get your mind out of the gutter, but basically on the balance sheet, look for current assets and we’re going to subtract current liabilities.

Now here’s the thing. If you’re sitting on a bunch of excess cash, right? You’re just stockpiling cash. You’re going to only want to account for how much cash you need to run normal operations. All right. So just subtract out excess cash. And then from current liabilities, if you have any interest bearing liabilities in current liabilities, just subtract that, exclude that. Okay.

So take current assets minus current liabilities, you’ll end up with working capital. That’s part one. Part two is a little bit easier. On the balance sheet, you’ll see PP&E or fixed assets. This stands for property plant and equipment.

Now the gross number is the number without accumulated depreciation, but in the section you should, okay, you should have accumulated depreciation. Just take your gross PP&E plus your accumulated depreciation. And you’re going to want to add up your net PP&E. Like I said, net PP&E just stands for your depreciated property plant equipment, which includes your trucks, your equipment, your building, etc., all the assets needed to run your business and to generate this operating profit.

Okay. Working capital plus net PP&E comes off the balance sheet, like I said, and it makes up your invested capital. Okay. Cool. You got that? You can handle that so far.

The next thing that you need to know is your payout ratio. And the way you find this is you just take your dividends or distributions that you take as a business owner. And that’s right here on the balance sheet under equity, but figure out how much you’re taking in dividends or distributions and just divide that by your NOPAT. And this will tell you what percentage of your net operating profit after taxes are you paying to yourself or to your investors or stakeholders in dividends or distributions.

But let’s just say that this number is 10%. Okay. So this is your payout ratio. Now we can get to the one number that will tell you how fast you can grow.

Before I get into that, here’s a quick story. I was working with a company years ago and the CEO is like, we’re going to grow. We’re going to triple our business. And I was like, wow. Okay. Before you do that, let’s run some numbers.

And I ran some numbers and I came back to him and I was like, if you triple your business, you will go bankrupt unless you go out there and raise capital. But guess what? They didn’t have a lot of profit because they were scaling so fast. So therefore banks weren’t going to lend to them. The markets were like not in good shape. So trying to get mezzanine debt was not really practical. They’re too small to raise capital in public markets. And they’re kind of tapped out with some of their investors.

So I said, if you grow at this rate, you will go bust. So instead I did this calculation. Let me show you how this works. Your growth rate is equal to your return on invested capital percentage times one minus your payout ratio.

If your mind just shut off because I did a mathematical formula, just stay with me. Just stay with me. In fact, if this is making sense to you, type a yes in the comments below, even if it’s not making sense, tell me where you’re getting tripped up so I can help you out and I can understand where to dive deeper. But this isn’t that hard. You got this. You totally got this.

Okay. So your growth rate is return on invested capital—we talked about how to compute that—times one minus your payout ratio. In other words, how much of your profits are you distributing?

Okay. Let’s put some numbers to this. Let’s say your company’s return on invested capital is 20%. All right. That’s a good, healthy ROIC. Your ROIC should be higher than what the stock market produces.

Okay. And if you look at the United States over the last 50 years, the stock market has returned 10%. So this is good. All right. This is good. You’re beating the market in your business.

If it’s less than 10%, that could be a problem. That’s a whole nother video, but you definitely want to fix your ROIC. So 20% times right here, this one minus 0.10 for 10% is 90%. So 20% times 90% equals 18%. 0.8 is what you’re going to get, but that translates to 18%.

So guess what? Here’s the skinny. Your business can grow at an 18% rate without needing additional capital.

Well, you may be like, Steve, that’s great, but we have a 30% goal. Okay. That’s fine. It just means that this delta between 30 and 18%, which is 12%, 12% times whatever you have in invested capital is how much money you have to go assume in debt or equity in order to keep the business liquid.

Now I know it’s a lot of math. It’s a lot of numbers. It’s a lot of gibberish for some of you, but the point of all this, even if you didn’t follow the numbers here, is that there’s a mathematical way to determine how fast your company can scale. If you just pour the gasoline on your business and you don’t understand these numbers, you’re going to run out of cash.

Do not do that. Please. I’ve seen too many companies fail because they run out of cash. I just showed you exactly how to compute this.

But look, if you need help with this, that’s what we do here at Coltivar. We put in place KPIs. We look at the numbers and we build strategies for companies so they can scale. And if they want to, they can sell, right? So that’s what it’s all about.

All right. In the comments, where are you at? Are you feeling good? Are you feeling confused? Are you feeling excited? You can even put an emoji down there if you want to, just don’t put the middle finger. Okay.

All right. Anyways, that’s what I have for you. There are a ton of resources awaiting you at coltivar.com. We have calculators and all sorts of things. So be sure to check that out. And until next time, I look forward to seeing you. Cheers.