23k Net in Two Months. Best "Sitting Cash" Strategy?

[Michael Stizza]

Greetings gentlefolks,

Two months ago, I ventured into my first business by way of an acquisition. Since taking over, I have generated 23k in Net Income. As of this writing, it is sitting in a 'war chest' ready for strategic usage.

Industry: Food / Restaurant
Product Offerings: Frozen Yogurt, Smoothies, Beverages

Debt on the Business
Initial Investment (debt to "myself"): $19,693.00
Owner Finance: $59,140.03 @ 6.00% Interest 60 Month Term
Other Loans: $9,847.90 @ 14.64% Interest 36 Month Term

Strictly speaking, my business is not my livelihood. I am an engineer by day at Cisco Systems and make a very comfortable Salary. This allows me to keep all earnings within my company and potentially reinvest.

At this time, I am trying to maximize returns. I am weighing various options and would greatly appreciate the input of experienced businessmen and women.

Options I have considered:
1.) Debt Management
Mitigate exposures and pay down existing debt as much as possible. Keeping cash on hand for working capital, petty cash, and savings for the slower winter months.

2.) Reinvest into another revenue generating opportunity. I've considered stocks and real estate, but I am extremely cautious in both of these arenas.

3.) Continue to reinforce my current financial positions, float the debt for the term of the loan, and remain as stable as possible for the first year of doing business.

In any scenario, I believe wiping out the high-interest portion of debt should be priority. But, again, I would love to hear the thoughts of the masses.

Just to clear, I am NOT asking for someone to write a monetary plan for me. I am constantly evaluating the best venue, especially as I am brand new to business. Having opinions on my particular situation is just one more tool on my belt.

 

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[AgainstAllOdds]

My opinion: Pay off the high interest debt. If there's no penalty for paying it off early, then that's a 14.64% annualized return on your money. It's doubtful that you'll have an actionable plan anytime soon that has an expected return at 15% or higher.

After paying off that loan, come back to the drawing board and ask "Can I make more than 6% on my money?" If you don't have an easy answer to that question, then start paying off the other loan too.

Also: You bought this business right before summer started. Will this business really stay that profitable the rest of the year? And if it won't, then how can you prepare for the other months?

 

[RHL]

Strictly speaking, my business is not my livelihood. I am an engineer by day at Cisco Systems and make a very comfortable Salary. This allows me to keep all earnings within my company and potentially reinvest.

Great play.

Also: You bought this business right before summer started. Will this business really stay that profitable the rest of the year? And if it won't, then how can you prepare for the other months?

This is the big question. You need to hustle like mad right now, because unless you're in AZ, TX or FL, the good times are not going to last all year. Ritas Water Ice, a huge company with millions to advertise, shutters all their stores near me during the winter. That tells me that those stores earn so little from Nov-May that they can't recover the cost of having 2-3 minimum wage employees there for 8 hours a day. That's pretty rough.

 

[Michael Stizza]

Also: You bought this business right before summer started. Will this business really stay that profitable the rest of the year? And if it won't, then how can you prepare for the other months?

Fortunately, I have 3 years of historical data I can refer to and answer this. Looking at years prior, we maintain profitability 8 to 9 months in the year (you can guess which months we break even / take losses). We begin to see profits in March, and sales begin to taper off in September. But in fairness there are still a lot of unknowns for me. I have incurred debt the previous owner did not have (Owner Finance equating to 1160 per month).

This is the big question. You need to hustle like mad right now, because unless you're in AZ, TX or FL, the good times are not going to last all year. Ritas Water Ice, a huge company with millions to advertise, shutters all their stores near me during the winter. That tells me that those stores earn so little from Nov-May that they can't recover the cost of having 2-3 minimum wage employees there for 8 hours a day. That's pretty rough.

I agree. We posted a VERY strong June, and I intend to keep the forward momentum.

Also, I am looking to position our smoothies as one of our redeeming graces during winter (the smoothie program just launched this week), but we're a Frozen Yogurt shop first and foremost. I am hesitant to do much else other than pay off the high interest debt, 'batten down the hatches', keep money in the war chest for winter, and evaluate our profits / losses after a full year of operation.

 

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[jon.a]

Fortunately, I have 3 years of historical data I can refer to and answer this. Looking at years prior, we maintain profitability 8 to 9 months in the year (you can guess which months we break even / take losses). We begin to see profits in March, and sales begin to taper off in September. But in fairness there are still a lot of unknowns for me. I have incurred debt the previous owner did not have (Owner Finance equating to 1160 per month).



I agree. We posted a VERY strong June, and I intend to keep the forward momentum.

Also, I am looking to position our smoothies as one of our redeeming graces during winter (the smoothie program just launched this week), but we're a Frozen Yogurt shop first and foremost. I am hesitant to do much else other than pay off the high interest debt, 'batten down the hatches', keep money in the war chest for winter, and evaluate our profits / losses after a full year of operation.

Invent a hot smootie

 

[Michael Stizza]

Invent a hot smootie

Various recipes for Hot Smoothies already exist, but I actually really like this idea. +Rep

Sorry, I know you meant invent a hot smoothie as it pertains to our current products. Didn't mean to sound dismissive.

 

[Yoda]

Many businesses fail from not enough positive cash flow. I know from experience.

I wouldn't even hesitate to pay the debt off strictly for the purpose of freeing up cash flow (especially given your seasonal business and heading into winter). The fact you have high interest loans makes this near an absolute necessity. That's a guaranteed return, and you're freeing up cash flow for reinvestment.

The fact you have another salary and don't depend on this, maybe twist your mindset... a little.

Maybe think of your business as positive or negative net worth for now. As it stands, on the books, you're in the red.

Pay the debts, reinvest, hold out for March. Then you can get a little creative with marketing, pay down the debts more, and be in the black by Summer's end.

Oh and, uh... congrats. Just don't blow it.

 

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[OperationMyWay]

Fortunately, I have 3 years of historical data I can refer to and answer this. Looking at years prior, we maintain profitability 8 to 9 months in the year (you can guess which months we break even / take losses). We begin to see profits in March, and sales begin to taper off in September. But in fairness there are still a lot of unknowns for me. I have incurred debt the previous owner did not have (Owner Finance equating to 1160 per month).



I agree. We posted a VERY strong June, and I intend to keep the forward momentum.

Also, I am looking to position our smoothies as one of our redeeming graces during winter (the smoothie program just launched this week), but we're a Frozen Yogurt shop first and foremost. I am hesitant to do much else other than pay off the high interest debt, 'batten down the hatches', keep money in the war chest for winter, and evaluate our profits / losses after a full year of operation.

I agree with the sentiments of paying off the high interest note. It will free up cash flow and give you an immediate return while also keeping some cash stashed away for unforeseen issues/expenses.

Speaking of unforeseen issues/expenses, I would suggest using the owner's note to your advantage. They still have skin in the game at this moment and have more incentive to be helpful to you and the business. You are in a good position to lean on them in times of uncertainty or problems. Some issues might be things they encountered in the past, but didn't think to mention because they were so second nature to them. In my dealings in a past life/career those former owners may be the nicest people ever, but once they have their money they can become harder and harder to reach. Don't know the situation here, just food for thought.

Running through one full year and working out kinks that come with seasonality of the business and the operations itself will put you in a much better situation to make decisions. Sounds like you are on the right track and are thinking about the right things. Keep it up.

Cheers!

Kyle

 

[Jon L]

certainly pay off debt, but I would keep $20k in the business account (or more?) for the lean months.

In the meantime, how can you increase business without investing much? Website? Google ads? Coupons? etc.

 

[biophase]

Pay off the 14% interest loan. Keep the rest in the bank for the winter months.

 

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[Michael Stizza]

Thank you very much everyone for your input. I truly appreciate the sound advice. I am going to stay the course and stash away cash, build reserves, and position myself for secure long-term success.

 

[Soulrize]

I wouldn't spread yourself out too thin as I've seen will keep you more attached and reliant to your salary job. I would grow the business and quit my job if you can have at least 2 shops and commit yourself to it full time. If you have no prior experience in real estate or stocks just know there is always a learning curve(loosing money and time commitment) . I say you should focus on one thing (preferably more knowledge about your business) because being one body on two boats wont take you any where.