Using One Business to Finance Another?

[orion_joel]

Bill, i think even more important then trying to make the second business cash flow positive in the shortest possible time is the idea of making it cash flow positive at all.

The time frame for cash flow positive is not really as important as the fact that the business will become cash flow positive. This is where good fiscal planning i think comes in and really working to achieve goals that you set for the business. While fair enough setting a single one time investment to cover start up may be all it needs, what happens if it is not cash flow positive in a year most people would start to just keep feeding money in to keep the business operating. Even more so if it is only a little bit say a few hundred a month. This may not even really be noticed if the funds of both businesses are shared. I think this is where it required good reporting on every front with multiple businesses.

I am almost sure one business supporting another happens very very often in retail. For example if you have a chain with 50 stores, i can almost gaurentee that you will find one that is losing money, and even though it is losing money they will keep it open, unless it is because of lack of customers. Because some locations that this sort of company are expected to be seen may be costly but they operate the location purely for visability.

[Evan]

While a positive cash flow is critical to any business, it's really combining both of your ideas. You want positive cash flow in the shortest possible time and also to be able to maintain it.

Depending on what type of business you operate, generating a positive cash flow (from operations) can sometimes be easier than in other industries.

Some companies still have a difficulty producing any profits, despite their popularity. Think of Facebook. The company's profits are small and most investors haven't seen any return on their investment. Yet the brand is very strong. In this case, some argue that it's management that is preventing growth and profitability. It's not always the brand.

Regarding chains having multiple stores, while some are more profitable than others, the squeaky wheel gets the grease. Starbuck's closed down hundreds of unprofitable shops not because it couldn't afford to keep them open, but because they were burdening the company's overall profit. It was a (smart) strategic move. Sometimes you just cannot survive in certain markets and it could have been bad research on the company's part. It's important to know who the demographics of your customer and whether the areas you're located typically satisfy that demographic.

[BillR]

Originally Posted by orion_joel

Bill, i think even more important then trying to make the second business cash flow positive in the shortest possible time is the idea of making it cash flow positive at all.

True - but the problem I've seen a few times is a successful business owner will start company #2 which does not do well.

Instead of cutting losses or forcing the cost cuts necessary to get into the black the person just keeps dumping profit from Company "A" into Company "B".

If you do that long enough you'll lose both of them.

[KristineS]

You're right about that Bill R. I worked for a television station that was family owned. The owner had long had the dream of starting another station in the Upper Peninsula. He finally started that station and practically drained our station dry supporting the other station. Instead of one station that was financially successful, he had two stations, only one of which was making money. It caused a lot of problems.

You have to know when to say when and cut your losses. If you don't, you could lose everything for which you've worked.

[Spider]

Still, one must also recognize that it is possible for a second loss-making company to be very good for the first profitable company. You could provide a top-notch service at loss-making rates in order to bring in customers for an associated business. In my wife's case, she is a very good master groomer but must compete with cheap groomers in the area, but to shut down the grooming business would put a big dent in the boarding business. She does the grooming (which she loves, anyway) at a loss or breakeven and makes her money boarding dogs.

I can see a computer programmer making a loss on selling computers so as to have access to new computer owners who would want custom programming.

I can see an auto dealer taking trade-ins at a loss to facilitate new car sales, and selling some of those loss-making used cars in the hopes of encouraging would-be buyers to opt for a new car.

I am told that McDonalds makes virtually no profit on their hamburgers and fries and make their profit on their soft drinks (¼ cents-worth of syrup + carbonated water that they sell for $1.99)

There can be many occasions making a loss on one business serves the purposes of another business. Don't be so quick to dismiss the idea.

[BillR]

Originally Posted by Spider

There can be many occasions making a loss on one business serves the purposes of another business. Don't be so quick to dismiss the idea.

I can't disagree with anything you said. The real key is having a plan up front and a purpose and sticking with it in regards to the finances.

On another note - did you know most of McDonald's profit comes from real estate? They have two types of stores - corporate and franchise. When someone wants to open a franchise McDonald's buys the land and forces them to rent it from them. About 50% of McDonald's stores are franchises.