As stated in Chapter 2, the number one (most frequent) answer to the question 'why be in business?' is 'to make money', and in spite of all the noble talk of stakeholders, the community, the workers, society, sustainability and so on, entrepreneurs are for the most part focused on making money.
Strategies can be set in perpetuity or more likely for a finite period and money-making strategies can be seen as continuous, but often they have a natural or predetermined time span. There follow examples, with descriptive titles and written explanations, of typical 'money-making' strategies. For three of them there is a simplified four-year balance sheet, income statement and cash flow model which gives a numerical view as to how the strategy might work.
1. The mundane money-making strategy -cash generation for ever
Mundane does not sound exciting and indeed a great many businesses are not exciting, for example electricity generation, fast food chains, retailing, much manufacturing, rail services and other modes of transport. However, they all continually need to be effectively and efficiently run.
The 'mundane strategy' is the strategy for many businesses that have established markets, potential sales growth, and production or service provision efficiencies that they can pursue to make more money. Their time horizon may be many years or potentially eternity. Their business model is to pay out adequate dividends to satisfy investors while retaining and subsequently investing sufficient cash to maintain and grow their operating capability. This model (Table 8.15) ties in with the basic dividend growth model in Chapter 2.
The model is simplistic in that there is linear growth in almost every aspect, but the point is to show that either the first-year profit could have been paid out as dividend and this repeated every year, or, as modelled, the retained profit is reinvested and, by year 4, net assets employed and shareholder book value have increased by 33 per cent to 2,010.
TABLE 8.15 Mundane money-making strategy