The value of a customer is a relatively simple concept. The value of a customer is just the total profit that an average, initial customer generates for a business. Suppose you only offer one product for sale and only sell it once to any given customer. Then, the value of the customer is the profit from that sale alone.

However, most successful businesses don’t sell once to a customer. They generate repeat business. The true value of a customer must account for profits from repeat sales made after the initial purchase. This concept uses the time value of money just a bit. Unless you are predicting long customer relationships, the inherent uncertainties of the estimates will probably dominate the effect of properly compensating for the time value of money, but we will show the full and proper calculation.

Let’s take the example of a fictitious company called “ABC Web Hosts.” (Note: The costs used below are not meant to be representative of real-life web hosting costs per se. The goal is only to show you the methodology of calculating customer value.)

Suppose to sign up a new account ABC Web Hosts charges $25 and $5 of that is expense to set up the new account. So, it looks like we earn $20. And, that is true for each new customer, neglecting costs to acquire the customer, i.e., marketing costs. Also, each person pays $10/month for hosting, and assume it costs $3/month to administer the account. So each month of hosting purchases generates $7 in profits.

People sign up for:

1 month Profits = $20 + 7 = $27

2 months Profits = $20 + 14 = $34

3 months Profits = $20 + 21 = $41

Suppose 1/3 of the people sign up for each of 1, 2, and 3 months. The total profits on average are

($27 + $34 + $41)/3 = $34 per customer

which corresponds to the value of a customer who buys two months service. (The actual distribution of customer purchases would need to be based upon ABC’s actual business results. Note: We neglect those paying for more than 3 months for convenience. Generalizing the calculation by adding 4 months, 5 months, … is trivial.)(Notice 2 months corresponds to what I refer to as “Customer Life Expectancy” in Thinking Like An Entrepreneur.)

Now, the question is: “What is the overall value of a customer?”
It depends upon the renewal value of a customer. (Note: These calculations are most appropriate to newsletters, magazine subscriptions, mail-order businesses, ongoing services, etc, where initial buyers are converted into repeat buyers.)

Suppose that: 50% of the initial customers renew for 3 more months

20% of the initial customers renew for 1 more month

30% of the initial customers don’t renew

(Again, we are just taking a simplified example. Some would renew for six months, etc. The actual distribution is best predicted from historical data for the actual company in question. Obviously, renewal rates vary, with quality of service and product being a strong factor.)

The average renewal length is (.5)(3) + (.2)(1) + (.3)(0) = 1.7 months.

Now neglecting second, subsequent renewals, the first renewal value of a customer is:

(.5)($21) + (.2)($7) + (.3)(0) = $11.90

Or thought of another way (1.7 months)($7/month) = $11.90

Notice two important things. One, we were careful not to incorrectly add to the ongoing profits the one-time set-up profit of $20. That doesn’t apply upon renewal. Second, we are neglecting the time value of money, because the time period in question is short (<6 months ). Recall, the average customer has been with us 2 months before he renews, so formally we could discount this $11.90 back a couple of months. Flip it. It is not material.

We neglect the time value of money for short periods of time.

So the average customer life value = $34 + $11.90 = $45.90. (Neglecting second time renewals which will follow.)

Using the above value for the average customer value would be a very conservative estimate. It neglects the effects of those customers who renew a second time. The further into the future we get, the more skeptical we must be of our ability to accurately predict customer valuation.

Let’s assume that 60% of all those who have renewed once, renew for a full one more year. (Again a simplifying assumption. You would use historical data as your best estimate of second renewal conversions.)

(0.7)($7)(12)(0.6) + (0)(0.4) = $35.28 (second time renewal value) would be added to the value of a customer ($7 profit per month times one year). Notice that long-term customers add significantly to the average value of a customer. This second renewal amount value of $35.28 is comparable to the $45.90 which measures customer value through the first renewal only.

Notice the all-important factor of 0.7 which accounts for the fact that only 70% of the initial customers have renewed the first time (the sum of 50% renewing 3 months and 20% renewing one month). This is easy to miss. We are interested in the value of acquiring a new customer and must properly account for customer attrition. If a customer hasn’t renewed the first time, obviously, he can’t renew a second time. And, again, we could properly discount this $35.28 by 3.7 months, as it is received 3.7 months from the first order of the customer. The effect here is small so we neglect doing this.

Lesson: To succeed in many businesses, you want long-term customer lifetimes.

Suppose all those who renew a second time are satisfied and stay for 3 more years in addition to the above time, i.e., they renew a third time. That would add (0.6)(0.7)($7)(12)(3) =$105.84 to the value of a customer. (If only 90% renewed the third time, we would pick up a factor of (0.9) to account for the further attrition. A customer once lost is not regained. At least not in our example! We must carry the factor of 0.7 along with our calculations. Think of it this way: Only 70% of the initial customers are around upon first renewal, and only 60% of those are around on second renewal are viable third renewal candidates. It was assumed all these hardy folks are now staying with us for the 3 more years. (This is the third renewal value)

Notice customers who renew a few times probably like what the company offers and you should have relatively high repeat business from them if your company is good. You will have some loss however. But, subsequent renewal rates beyond the second are usually higher than first time renewal rates in many areas like newsletter publishing.

Now 3 years is getting to be a longer period of time, and we should examine the time value of money. The typical renewing customer has been with us now for about 15.7 months (2 months + 1.7 months + 12 months.) Assume the customer who stays with us for the three years renews annually. (As usual, a company’s actual historical data would be the basis for the real numbers. Don’t confuse customers staying on for 3 years with paying for three years in advance! How they pay needs to be considered also! Our simplifying assumption is that they pay for one year service in advance, but stay on three years in addition to the 15.7 months.)

Using the time value of money, we could discount each year’s value back to a given point in time. (Properly, we should really discount it all the way back to the very start of acquiring a customer. I don’t want to do that as it forces us to break time value of money into monthly periods. This is covered in Thinking Like An Entrepreneur and many other books, and I assume you can generalize time value of money calculations to a monthly basis.)

For example, at a discount rate of 10% and discounting the value only back to the time of the third renewal (15.7 months), each annual payment contributes as follows:

(0.7)(0.6) (($7)(12) + ($7)(12)(1/1.10) +($7)(12)(1/1.10)² = $84 + $76.36 + $69.42 = $229.78)) = $96.51

Recall just taking (0.6)(0.7)($7)(12)(3) yields (0.6)(0.7)$252 = $105.84 which is a bit too high. The difference is about 9% between no time value of money and time value accounted for.

I wrote the above in such a way that we don’t forget the attrition factors of (0.7)(0.6)

All rightty then. Where are we? OK. We must calculate the overall value of the initial customer.

It is: $34 + $11.90 + $35.28 + $105.84 = $187.02 where we have been just a wee bit sloppy with the time value of money on the last term of $105.84. And a bit wee less sloppy with the middle terms! To improve the calculation we could use $96.51 as the last term. Then, we could more properly discount the last term of $96.51 back one more year. Or, we could break the calculation into monthly time value of money periods and do the whole thing entirely properly (Neglecting the small difference between 1.7 and 2 months).

But, that is really unnecessary.

Lesson: The uncertainty of business conditions and other factors are large compared to the time value of money over short periods of time. Inherently, the validity of any such customer life value calculations is less certain with time. Yet, you should probably account for the time value of money. I leave it as an exercise to put the above onto a monthly footing and account for the time value of money in full detail (i.e., I should have chosen an example where everything is renewed yearly to avoid distracting complications I didn’t want to go into!).

Next up. How much should you pay for a customer? Let’s suppose you do the above in brutal detail, account for the time value of money and get an average customer value of, oh, let’s just say about $170 when discounted to the present (I discounted the improved last term of $96.51 back one more year. And, we neglect sales beyond about four years, which is getting pretty far into the future).

Some mail order books say it is ok to spend right up to the value of a customer on your advertising. (This can lead to what I briefly call a “revenue trap” business, one that grows revenues significantly, but never generates decent profits. As mentioned in Thinking Like An Entrepreneur this is a big issue when valuing a mail-order business. You need to be aware of this before you blindly start applying Price-To-Sales ratios for company valuation.) The discount rate is not enough to compensate for the risks unless you set it high enough.

We used 10%, a rate of return you could get investing passively in quality common stocks. If you were to acquire customers through advertising, you would be aiming for the discount rate of return, which is inadequate given all the risks, if you acquired customers right up to a cost of $170.

Suppose a year from now you received $110. How much would you be willing to pay at present for this? Well, if you pay $100, you have just attained the “market” discount rate of return of 10%. If you know you could get $110 in a year with higher safety, why would you invest $100 for a higher-risk endeavor with only the same return? That is what you are doing with the $170 if you are willing to spend the full $170 to acquire a customer. You are just breaking even when you account for the time value of money. That is not good enough.

Lesson: Either you must allow a sufficiently generous discount rate comparable to the high risk of return you demand for the investment in the advertising promotion, or else, you must buy a customer for less than the estimated customer value, if you choose to use a conservative discount rate.

Example: We might use 15-20% as a “safer” more appropriately compensating rate of return. Or, let’s just, at most, pay 50% of the value of a customer. Compare this to buying undervalued common stocks. If you are not demanding enough and pay $100 a share for a company worth $100 a share, it is difficult to make a lot of money.

You want to buy a company for a strong discount to its “intrinsic” value. In the same way, you want to buy customers for less than they are really “worth.” Conversely, if you are too demanding and greedy, saying you will only pay, at most, $1 a share for a company whose value is “really” $100 per share, you will never have the opportunity to buy the stock. You probably will never see that price.

Similarly, if you demand a profit from your first promotional advertising without accounting for renewals and follow up sales (in our example, this is the initial order for 2 months’ hosting generating a profit of $34 before allowing for advertising. So “too greedy” is defined as demanding an advertising cost per new customer of less than $34), you probably won’t find any “viable” advertising outlets.

A reasonable target might be to acquire a customer for half his worth or less. Here, about $85. From a profitability standpoint this is good and it reduces our risk. But, be sure to examine the cost from a cash-flow standpoint. Remember, if you are paying up-front for a customer, most of whose worth will be returned to you after the first, second, or third year, you must be alert to the cash-flow consequences. (Basic cash flow is covered in Thinking Like An Entrepreneur)

We assume we collect $34 right away. We get $11.90 a couple of months later. Then, we get $35.28 about 3.7 months after acquiring the customer. Then the next payment is not until a year later. So our free cash flow is only about $81.18 within the first year, occurring within the first half of the year. It is “safest” if we try to acquire a new customer for no more than about $80 per customer.

Now to bring all this to conclusion, we assume we are willing to pay $80 to acquire a new customer. The customer’s value is about $170. Suppose you buy banner advertising for $10 per 1000 exposures ($10 CPM, cost per thousand). If we get a 1% clickthrough rate of these people going to our site from the banner and if 1% of the people visiting our site become customers, we have achieved one customer for 10,000 exposures.

(10,000)(0.01) =100 people coming to our site from the banner

(100)(0.01) = 1 customer acquired.

At $10 CPM, 10,000 exposures cost $100. This is a bit outside of our desired cost to acquire a customer. If we can live with the cash-flow consequences, we might choose to run the advertising campaign.

Suppose you can increase both clickthrough and conversion to 1.1%. Then for each 10,000 exposures, we obtain 110 people visiting our site, and, of these, we acquire 1.21 customers. This is a cost per customer of $100/1.21 = $82.64 which is much closer to our target. If we could lower the CPM, that would help also.

Lesson: Increases in clickthrough (number of people seeing our banner who go to our site) or conversions of people visiting our site to buying customers have significant impact upon profitability of promotions. For example, in web hosting, maybe the costs per servicing an account drop sharply with more customers. This would affect the value of each customer via the changing expense which we just set at $3 per month. Also, customer happiness and satisfaction is crucial to having profitable customers.

This is all tenuous, as expenses change, competition might offer better deals, etc. Your estimates of customer renewal are tenuous and estimates only. Buying customers for up-front amounts approaching the customer value has cash-flow consequences. Buying customers is like buying stocks. You need to acquire them at a significant discount to their value to really succeed.

Finally, notice where the non-math enters the picture. The artistic, the psychological, the creative, if you will. It is in the customer service. With bad service and products, you won’t have renewing customers. You will have one-time buyers. It is in marketing. How many people clickthrough, for example, is a function of banner effectiveness and design. (Notice: We did not allow for any extra marketing expense for conversion of a first-time customer to a repeat buyer. We assume an e-mail is all it takes. In other businesses, such as newsletters, a certain marketing amount is spent upon generating the repeat subscriptions. The cost needed to get renewals would need to be considered.

Learning how to calculate customer value gives the marketer the ability to better evaluate whether or not a particular advertising campaign is worthwhile.

Those who have read Thinking Like An Entrepreneur might want to reread the chapter on expectation values and see how closely the concepts there overlap with customer valuation.

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The most common method people use to measure business success is financial worth. The more the entrepreneur and business are worth, the more successful the entrepreneur is considered to be.

The extreme of this would be the valuation of an entrepreneur’s publicly traded company. The entrepreneur’s company’s market value is recorded daily in the newspaper. The entrepreneur could look at the stock quote and compute his financial value each day, if he so desired.

This measure of worth is given great weight by society. We see this from the popularity of the Forbes’ list, which records the wealthiest people in the world. We see this by the desire of so many young people to make such a list someday.

But, consider the case of two entrepreneurs. The first entrepreneur forms a new company which goes public. In a short time, the entrepreneur sells many of his shares. He becomes worth tens or hundreds of millions of dollars, now held in cash. Then a few years later, his public company fails and goes bankrupt.

The other entrepreneur starts a far more modest endeavor. Her company grows to $5 million in sales over eight years and maintains decent profitability along the way. She has satisfied customers and enjoys her business.

The traditional measure of success says the first entrepreneur is more successful than the second. But, that has always seemed incorrect to me! I’d say the second person is the more successful businessperson. The person who runs a solid company should outrank someone who spun straw into gold. Financial shrewdness is not necessarily successful entrepreneurship.

I doubt few, if any, entrepreneurs behind successful, publicly traded companies actually evaluate their worth according to the stock market. The stock market having a good day doesn’t make them any more successful as a businessperson. The stock market having a bad day doesn’t make them any less successful in their business. They are too busy running their companies to worry about fluctuations in market valuation. Any way you look at it, financial worth alone is by no means an adequate measure of entrepreneurial success.

Many intelligent people, business owners and non-business people alike, measure their success by how much money they save from their annual earnings. This way, someone earning $100,000 a year, but saving $20,000 might feel they have done a better job than someone earning twice the amount but only saving $25,000.

Savings measures both offense (earning power) and defense (frugality). The popular book, The Millionaire Next Door, points out that both offense and defense are necessary to building wealth for most people. Further, reasonable frugality is a desirable trait for an entrepreneur, as it shows responsibility. Frugal businesses are often successful businesses.

Yet, someone will argue that a person who earns money should be able to spend it as they wish. So, they bought a few new toys? So what? They still ran their business profitably and should be considered successful. Harry, the miser, who eats porridge and doesn’t heat his home in the winter, shouldn’t be considered more successful just because he has a somewhat more modest lifestyle!

The financial success of a business is best measured by focusing upon the company profits for the year. Some allowance might be made for the level of investment the company makes toward future growth and future profits, so as not to penalize a company for investing in the future. What the entrepreneur does with the money is another issue entirely!

Again, for publicly traded companies, Wall Street is most concerned with profits or earnings. Analysts constantly try to predict how much a company is expected to earn. CEOs are very concerned about earnings. Often the CEO’s bonus is tied to the company’s earnings. This can lead to CEOs making decisions which enhance current accounting profits at the expense of the future.

Seldom do small business owners play such financial accounting shenanigans. They want an accurate measurement of how much money their business really earned. This is why knowledge of accounting is so important to small business owners.

However, if entrepreneurs become too earnings focused, they may cut corners leading to less customer satisfaction. They may not reinvest enough in their company’s future. They may compromise their relationship with their employees. This can lead to less success in the future.

There are many other measures of success, besides profits, which can be evaluated by looking at the company’s financial statements. Increasing profit margins, paying down debt, increasing the effectiveness of advertising are some examples.

In each case, the entrepreneur should compare this year’s performance to the year before. The entrepreneur should look at growth in sales, the number of new clients, etc. Ed Martin, of About.com’s Guide to Small Business, points out that growth is one key factor indicating survivability of a business. Businesses which grow can survive.

Some business owners measure their success by their company’s position within the greater industry. Yet, for most small businesses, industry position, even if meaningful, is difficult to ferret out. But, if you are one of the industry leaders, your company is probably successful!

The above are the more conventional measures of business success. However, they are far from the only measures entrepreneurs use.

One of the best measures of success is the quality of the products you provide. Being proud of your products, sincerely feeling their usefulness, and making meaningful improvements in your company’s products or services are big factors making many entrepreneurs feel truly successful.

Some fly-by-night gadget, seen on late night TV, might generate that company more profits and even better operating ratios than your company has. Yet, many entrepreneurs will feel they are inherently more successful. It’s success as measured by pride in the quality of their product.

Customer satisfaction, whether measured by customer surveys or repeat business, is another measure of success. If customers find your products useful and enjoy doing business with your company, your company’s future success, no matter how you measure it, is more likely assured.

Employee satisfaction is another measure of success. The great companies tend to have employees who pride themselves in working for their company. Consider what your company has done for its employees throughout the year. If you added a 401(k) plan or improved the level of employee feedback and recognition, for example, you should deem your company more successful than last year. You own a better company.

In fact, any internal improvements you’ve made within your company makes your company more successful and is reason for celebration. Most successful entrepreneurs take pride in these day-to-day operating improvements.

I’ve listed some measures of success from the top down. Most non-entrepreneurs would measure the success of a business by those at the top of the list. They are more money focused. Those at the bottom are more company specific, and many would consider ho-hum.

Yet, the measures at the bottom of the list, like improving your product, your customer satisfaction, your employee relations, and internal operating improvements are often things the entrepreneur or small business person can directly focus upon. Further, they are often the key to business success, measured in financial terms.

It’s like playing tennis. Even if the goal is to win the match, contemplating the match overall won’t lead to successful play. Focusing upon each shot as it happens will lead to success. Success is measured by each individual serve or return. The match follows the points. Winning small business points means focusing upon what really matters. Success is measured by what you do within your company.

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1) Will the company be able to maintain high profit margins? Low profit margins are dangerous to your company’s survival. If you only have a tenuous 2% net profit margin and prices rise a few percent, you are in trouble. Higher profit margins allow room for error and changing cost structures.

When you think of low profit margins, imagine a guy standing at the edge of Niagara Falls with a little tin cup. He is trying to reach into the torrent of water to pull out a little drink. It is dangerous to place yourself under tons and tons of water to get a little cup full. Similarly, who cares if your business generates millions of dollars in revenue, but only can earn $10,000? It is what you keep that matters.

2) Good Revenue per sale. This is often missed by many new entrepreneurs. It is difficult to succeed if you are selling a one-dollar product. To generate a million dollars in revenue means you must sell one million of your product. That’s a lot of sales! If you are selling a $1,000 product then to generate a million dollars in revenue you only need a thousand sales. Guess which level of sales is easier to process and fulfill for a smaller company?

3) A proprietary product. Or, at least, a tremendously growing area where all the companies in the field can’t keep up with demand. A proprietary product is one which your company exclusively controls. This means another company can’t just begin producing and selling your product. Patents and copyrights are two ways to secure a proprietary product.

4) Something that you love to do. It is difficult to do something well if you don’t feel passionate about it. Choose to build a business in a field that you love, and you will find yourself enjoying it. This will help lead to success.

Never just enter a business because the financial numbers seem to indicate a great business. To really make money demands growing a business, and this will take years. Be sure it’s something you want to do. Something related to a life-long hobby or interest is ideal.

5) Will the business have good cash flow? It is possible for a business to be generating excellent sales and profits, and yet be losing cash. You need cash to pay bills. A cash strapped business is a business that will struggle to grow. Do a cash flow projection for your start-up business.

6) What are the growth prospects for your business? What will be required for you to grow the company? Many entrepreneurs start a business and are happy when they see it making money. They are often not as happy when they realize that profits have plateaued. Think about how you will grow.

If you start a restaurant, for example, your profits will certainly level off. You will only have so many customers eating at your restaurant in any given year. To grow would require adding a second restaurant. But you cannot run two restaurants as you do one restaurant. You can be on top of everything at one location, but you must be away at least part of the time when you have two restaurants. And what if you had ten? As you grow you will need to learn to delegate. You will need multiple locations.

Compare this to a mail-order business. It can be run from one location. Yet, sales are essentially potentially unlimited with only small structural changes to the business. Doing more of the same thing in the same way is easier than changing the way you operate.

7) The business must be something you are psychologically suited to do. This is not the same as loving the area. Some people are more outgoing and social than others. Other people are more reserved. Each is suited to building different types of businesses.

Needless to say, a business that demands much personal selling and personal customer contact might not be ideal for the more reserved person. Yet, such a person could very successfully run a mail-order or Internet-based company.

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But, if you were to try to summarize the financial goal of your business using only one criteria, what would it be? Some might answer that the goal is to maximize profits. In an attempt to increase profits, some companies try to generate more and more revenue, even if the added revenue is less profitable than existing revenue. This results in lower profit margins.

If your sales triple and your profit margin drops in half, profit-wise, you come out ahead. For example, going from sales of $5 million and profit margins of 10% ($500,000 profits) to sales of $15 million and margins of 5% ($750,000 profits) increases profits by 50%.

But, is this truly desirable for most businesses? Low margin businesses usually involve higher risk. While companies are keen about measuring profits, few companies are as concerned with measuring the level of risk the company is taking to achieve the current level of profitability. Profits and profitability aren’t the same. So, too, some companies take much greater risks to earn their money.

Lower margin companies are less resilient to increasing costs and changing market conditions. A drop in sales for a store operating on thin 2% margins often results in absorbing financial losses. And, there isn’t only a quantitative difference between operating a business that is making money and a business that is losing money. There is a qualitative difference. The business which is making money can continue indefinitely. The business which is losing money only has so long before financial reserves run out and it must cease operations.

Similarly, some companies sacrifice customer care and product quality in an attempt to increase current operating profits. However, such behavior often leads to lower customer satisfaction and lower future sales. Reputation is compromised, and the company’s future profits decrease. The current profit and loss statement doesn’t show the real devaluation which has occurred to the company. Nor does the balance sheet.

Another possibility is maximizing the long-term value of your business as an ongoing concern. Measuring this value is difficult, if not impossible. It involves at least three factors. First, the current profits the business yields. Second, the estimated future profitability of your company based upon your company’s reputation and future capability. And, third, the level of risk inherent in how you operate the business.

Whenever you plan to increase present profitability or profits for your company, ask if your actions will compromise future profitability or increase the risk inherent in how you are running the business. Keep an eye to the long-term value of your company. You will invariably have an idea of whether your actions are increasing or decreasing your company’s long-term value.

For example, in an attempt to improve the return on equity (ROE) of a business, some business owners borrow money to leverage operations. As long as the borrowed money can be put to work earning more than the interest rate you are paying, you come out ahead profit-wise and the ROE increases.

However, most knowledgeable small business owners are leery of borrowing too much money. They inherently know that debt increases the danger of a business failing. If sales drop, for example, the interest keeps accruing. That interest and principal must be repaid, even if the use to which the money is put doesn’t generate an adequate rate of return. Trade credit which varies with sales is the safest form of company borrowing.

Yet, debt isn’t completely bad. During good business conditions, adding a bit of debt allows the company to earn more money. These added earnings can be saved as capital for a rainy day.

Especially for cyclical companies, such as automobile manufacturers, retained and conservatively invested capital is crucial to long-term survival. Automobile manufacturers are notorious for earning billions of dollars during good economic times and, then, losing billions of dollars during recessions.

Similarly, financial reserves give a margin of flexibility and safety to a small business. However, small business owners tend to be very one-sided when viewing financial reserves. Small business owners love watching the financial reserves pile up. But, as soon as business conditions degenerate, small business owners hate watching financial reserves dwindle. There is a feeling of failure, a feeling that all that was worked for is in jeopardy. A thought that closing the company and getting out while the getting is good might be the best move.

Rather than viewing financial reserves as necessary to the normal operation of a business, they have come to view the reserves as part of their personal return on their business investment. In the worst cases, extra profits during the good times have been paid out to the business owner and invested in such necessities as a Porsche. Then, when the bad times hit, the business doesn’t have the financial reserves to continue operations.

To be financially successful in business, most small business owners will need to operate their business for many years. It is in the later years when the equity base is large that the biggest financial return will be earned. This is why it is so crucial for your company to maintain a strong financial position which will allow it to repay debt quickly if business conditions change. You need to be able to stay in business.

Extra capital retained within a business can also be ventured on new products or marketing strategies to grow your business. Many new entrepreneurs say, “I’ve got a great idea for a business. It’s a sure thing. It will generate huge financial returns.”

This usually portends a loss of capital. Had the entrepreneur acknowledged the loss of capital was a real possibility, he might have done things differently. For example, maybe the individual wouldn’t have been so quick to mortgage his home heavily and fully deplete his 401(k). The money he risked was not appropriate “venture capital.”

The small business owner’s best source of “venture capital” is the extra profit your current company has generated. Effectively reinvesting this money is a key to financial success. Effectively reinvesting this money will give the greatest chance of growing the long-term value of your company.

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