In this episode of the Ecomm Breakthrough Podcast, host Josh Hadley explains why distributable cash is the most critical metric for e-commerce business health. He clarifies the difference between net income and distributable cash, warning against reinvesting all profits and leaving yourself financially vulnerable. Josh recommends distributing roughly one-third of net income while retaining working capital for growth. He also shares his personal wealth-building framework, allocating distributable cash across life insurance, S&P 500 index funds, turnkey real estate, and speculative assets, helping entrepreneurs build lasting personal wealth independent of their business’s uncertain future.

Links and Mentions:

E-commerce Platforms
“Shopify“: “00:00:00”
“Amazon“: “00:00:00”
“TikTok Shop“: “00:00:00”

Financial Concepts
“Distributable Cash”: “00:01:02”
“Net Income”: “00:01:02”
“Cash Conversion Cycle”: “00:02:09”

Investment Recommendations
“Life Insurance”: “00:13:29”
“S&P 500 VOO Index Fund”: “00:15:24”
“Roth IRA”: “00:16:18”
“REITs (Real Estate Investment Trusts)”: “00:18:14”

Books and Videos
“Podcast Episode with Mike Olson“: “00:14:31”
“Podcast Interview with Dew Wealth“: “00:17:18”

Additional Notes
“Speculative Investments”: “00:19:55”
“Oil Investment Opportunities”: “00:20:39”

Timestamps:

00:00:00 Introduction & Host Background
Josh introduces himself, his e-commerce experience, and the purpose of the E-com Breakthrough Podcast.

00:01:02 The #1 Business Metric: Distributable Cash
Explains distributable cash, how it differs from net income, and why it’s crucial for business health.

00:02:09 Importance of Working Capital vs. Owner Distributions
Discusses the need to balance reinvesting in the business with distributing profits to owners.

00:03:17 When to Reinvest vs. Distribute Cash
Describes scenarios for high reinvestment and sets a 33% distributable cash target for most businesses.

00:04:31 Why Distributable Cash Matters for Entrepreneurs
Explains the risks of relying on a future exit and the benefits of building wealth through regular distributions.

00:05:30 Risks of Operating in Others’ Sandboxes
Highlights the vulnerability of e-commerce businesses to platform changes and the importance of diversifying wealth.

00:07:23 Psychological Benefits of Distributable Cash
Describes how having cash outside the business reduces stress and enables better decision-making.

00:08:51 Common Mistake: Confusing Net Income with Distributable Cash
Shares a cautionary story about an entrepreneur who misused net income, leading to debt and financial trouble.

00:10:36 Key Lessons: Annual Distributions & Retaining Working Capital
Emphasizes the importance of annual cash distributions and not treating all net income as distributable.

00:11:29 What To Do With Distributable Cash: Josh’s Framework
Introduces Josh’s personal strategy for allocating distributable cash to build long-term wealth.

00:13:29 Bucket 1: Life Insurance
Explains using life insurance for creditor protection, steady growth, and as a financial safety net.

00:15:24 Bucket 2: S&P 500 Index Funds & Retirement Accounts
Advocates for steady, long-term growth via index funds and maximizing tax-advantaged retirement accounts.

00:17:18 Bucket 3: Real Estate
Recommends turnkey single-family homes over short-term rentals to avoid creating another business.

00:19:55 Bucket 4: Speculative Investments
Allocates a small portion to speculative assets like crypto or individual stocks for potential upside.

00:20:39 Bonus: Oil Investment Opportunities
Mentions investing as a limited partner in oil drilling for tax benefits and passive income.

00:21:32 Conclusion & Call to Action
Encourages listeners to share the episode, leave reviews, and spread the word.

Transcript:

Josh Hadley 00:00:00  Do you want to know whether your business is healthy or not? Whether you’re going to be succeeding over the next five years or whether you’re going to be struggling? Today? I’m going to be sharing with you the number one business metric that tells you the exact health of your business and whether you’re about to continue to grow or decline. Welcome to the Ecomm Breakthrough Podcast, I’m Josh Hadley. I’ve scaled my own ecommerce brand from 0 to 8 figures, and I’m actively building towards nine figures in sales. This podcast is where I document that journey and share the systems, the strategies, and the lessons learned in real time so that you can learn what actually matters and scale your own business first and foremost. Who am I? My name is Josh Hadley. I’m a man of faith. I am a father of four and a husband to a beautiful wife. I’ve been in the e-commerce space for over ten years, and I’m doing over $20 million and doing multi millions on Shopify, TikTok shop and Amazon as well. And also the host of the Ecom Breakthrough podcast, which is the number one business strategy podcast for ecommerce.

Josh Hadley 00:01:02  Let’s talk about what the number one business metric is that allows you to know whether your business is healthy and that is distributable cash. Let’s talk about what distributable cash is because it’s actually different from net income. Net income is what is left over after you have, you know, basically run the business over the course of the month or over the year, right. So you’re going to take out your cost of goods. You’re going to take out fulfillment costs. You’re going to take out advertising, your overhead expenses, salaries, etc.. What’s left over is your net income. Here’s where a lot of entrepreneurs and business owners go wrong. They mistakenly think that, oh, I netted whatever that net income amount is. And then they think that’s my personal money. That’s all distributable cash. And the reason why this is so important to delineate between distributable cash and actual net income is for the following reason. Your business needs working capital in order to grow. And so working capital is what allows you to go hire that next person, or to go invest into a new product that you have never released, or to reorder additional products that are already selling well, that are maybe growing quickly.

Josh Hadley 00:02:09  And so it’s important that you do not a starve the business for the working capital that it needs, but be it is also very important that you are actually able to distribute a profit or distributable cash to the owner of the business. And here’s why I argue that this distributable cash is the number one metric for a healthy business. If you have to take, let’s say it’s it’s 90% of your net income and reinvest it into the business just to keep it afloat. It means a you probably have a really bad cash conversion cycle, which if you want to learn a little bit more about that, go check out some of my other podcast episodes where I do talk about the cash conversion cycle and how to optimize it so that you have a very healthy cash conversion cycle, even a negative cash conversion cycle where you get paid even before you’ve had to outlay any money for generating that revenue or that cell. It is possible, even inside an e-commerce business. Well, number one, if all of your money is having to be reinvested into the business, that’s not a very fun business to be in or you’re experiencing some massive growth, which is okay.

Josh Hadley 00:03:17  I would if I’m seeing like 200, 300, 400% year over year growth in my business and I can see that continuing, I would argue that that may be a great place to reinvest 90, 95% of your net income back into the business. However, I would argue for most business owners that are not experiencing 100, 200, 300% year over year increases in their business, a 33% target for distributable cash should be kind of like the goal. And what that means is, let’s say you make for easy rounding purposes. Let’s say you make $1 million in net income. All right. So the business netted you $1 million in net income, Distributable cash percentage being 33% means I would be pulling out $330,000 from the business at the end of the year, and that’s going to be distributed to the owners of the business. Now, why is this important, and why would distributable cash be the metric that knows whether you’re healthy or not? Distributable cash is so important because as a business owner, if you’re just perpetually kicking the can down the road, hoping that one day your business is going to have this massive exit and you’re just going to have life changing money at some, you know, future point in time.

Josh Hadley 00:04:31  Sadly, 99% of entrepreneurs never experience that. And so having distributable cash allows you to still build your wealth while still building the business all at the same time. And some of the most successful businesses spit off a ton of cash because they have really, really good cash conversion cycles in their business. And so they don’t even if they’re growing 100% year over year, they don’t need 90% of the net income to go fund the future growth in the business. So that’s why I would say 33% is kind of the gold standard for distributable cash that you’re able to take out of the business. Now, the next question you may be asking is, Josh, why in the world should I be taking cash, you know, from the business at all, right. Why am I not just reinvesting 100% of it back into the business? I’m going to answer that for giving you a couple of reasons as to why you won’t. You don’t want to do that. Number one, your business is the most risky asset that you are investing into, right? Because your business, there’s kind of a couple things at play here.

Josh Hadley 00:05:30  If you’re in the e-commerce space, most likely you’re playing in somebody else’s sandbox on a daily basis, which means if you started your business on Amazon, who sandbox are you playing in Jeff Bezos sandbox, right. Whose rules do you have to abide by? Jeff Bezos rules. And if any time Jeff Bezos wants to come to you and says, like, I don’t want you playing in my sandbox anymore, can he kick you out of that sandbox? He most certainly can. And your business dries up instantly, overnight. All right. Well, what if you’re on Shopify? Okay, but you own your own customer email list. Oh. All right. Maybe. But guess what? You’re probably generating a lot of your traffic from meta. So now, whose sandbox are you playing in? Mark Zuckerberg’s all right. Guess who has to abide by Mark Zuckerberg’s rules? You do. And if you don’t want to abide by his rules playing in his sandbox, guess who gets kicked off that platform? You do.

Josh Hadley 00:06:19  But maybe you’re doing really well on YouTube. Or you’ve got a lot of, like, good SEO traffic and you know, you’re ranked really well even in AI algorithms. Guess what? You’re playing in Google’s sandbox or you’re playing an open AI sandbox. It doesn’t matter in the day and age that we live in. You are playing in somebody else’s sandbox, and your business is susceptible to just one little tweak to the algorithm on meta, which we saw, and I think it was about 2016 where they had to adjust like their cookie compliance and being able to track things. Right. And that upended so many people that were generating most of their traffic and revenue from advertising on meta. right? SEO has continued to evolve over the last few decades on Google, and we know that there’s been Google algorithm updates, and now it’s AI that we’re worried about. And SEO is almost becoming a thing of the past. So guess what? Your business is susceptible. And so rather than like feeling uneasy and knowing that, hey, I could wake up tomorrow morning and my Amazon account is gone, or Google changes their algorithm for the worst for my business, or meta kicks me off because they suspended my ad account for no good reason.

Josh Hadley 00:07:23  I love to be able to sleep confidently at night knowing that yes, I am playing in somebody’s backyard or I’m playing in somebody else’s sandbox, but I’m doing so deliberately and I am still building my wealth at the same time. So not all my eggs are just in one basket. It also allows me, as a business owner, to be able to make better decisions in my business. If I’m reinvesting 100% of my profits back into the business, guess what? My level of anxiety and stress is through the roof. Because I know that if I make one bad call and things start to go sideways. Not only is it the business at risk, now, it’s my entire net worth is at risk. And that’s not a good place to be in as a business owner, to be able to place really big Pos, to be able to fund aggressive growth channels, or maybe to go higher that next to a level team player that’s going to come in and be a game changer to your business, you’re going to need to make some of these bets, and you’re able to make some of those bets when you know everything is not just riding on that one decision, you could say, hey, even if I’m wrong, guess what? I’ve at least sheltered away a few acorns for myself that like, if things fall apart, I don’t have to go live out on the streets, right? That is ultimately it’s it’s more about like your personal psychology as an entrepreneur, knowing that, like, your downside risk just got mitigated because you’ve been able to distribute income from the business to yourself.

Josh Hadley 00:08:51  That’s why it is so important to be able to have distributable cash in the business, because the ones that are able to take out a good amount of cash from the business are the ones making better business decisions overall. I want to give you a simple example and a story here to really put on the point here that sometimes people also do the opposite. They think that just because you made $1 million in net income, they think that all of that is distributable cash. And I’m here to kind of tell you why that’s not true. The story is an entrepreneur that I was working with closely reached out, and he had told me, hey, I would love for you to take a look at my books. Like I’m struggling, like I’ve got some debt payments due, etc. and I asked him like, well, dude, you said you were growing aggressively. Things were going well. You almost netted $1 million last year. Like, show me your financials. Let’s see what’s going on. And he pulled up his financials.

Josh Hadley 00:09:38  And here’s what I saw on his balance sheet. He had three different loans. And I told him I was like, why in the world do you have three different loans. And each of these are about six figures each. And he said, oh, well, I needed those in order to like, reinvest into the business to go fund a future POS. And I said, but didn’t you make $1 million last year? Like what happened to that? And he said, oh yeah, I took all of that money because it was net income. And I went and I bought a house, I bought a property. But don’t worry, I’m thinking of like Airbnb being that property out, it was like a second residence. Like, so I’m still going to be able to make some money on it, like it’s an investment property. Josh. That was a good call for me. And I said, dude, your your problem in your business is the fact that you just mistook your net income for distributable cash, and then you made the problem even worse by then taking out loans that are now reducing your overall profit margin in your business, and you are going to go down a very, very slippery slope.

Josh Hadley 00:10:36  So there’s a couple lessons learned here. Number one, if you’re a business owner, I would argue that it is wise to pull out distributable cash from the net income every single year. In addition to that, the second lesson learned is that it is also important to not mistake that 100% of that net income is distributable cash. You need cash in the business to be as working capital in order to continue to fund that growth. So don’t just look at your bank account and say, oh, this is how much money I made. I should pay myself this amount of money. Those are the two key points that I want to talk about. Now, the next question, probably going through your mind at this point is, all right, Josh, I hear you. I am taking out some distributable cash from the business on a yearly basis. But what do I do with this cash? And I want to give you my framework as what I do with the distributable cash that comes out of the business that allows me to.

Josh Hadley 00:11:29  Number one, sleep better at night. But number two, be able to make massive bets in my business knowing that not everything is riding on that one decision that I made. As an example, we just placed a POA for 150,000 units for one single SKU in our business. And you know, frankly speaking, I’ve never made that large of a purchase or investment in my life thus far. Okay. This. This is an investment. Well over a half $1 million on one single product line. Now, the reason why I’m able to so confidently take those bets now is because over the past decade, I’ve been taking distributable cash from the business and then setting up, you know, some some assets for myself and being able to grow my wealth over a slow period of time. So that, as an example, if my business never exits one day, I’m okay. I am still building generational wealth, but I’m doing so over a slow period of time. And I want to share with you kind of like that framework in the way it looks, because the best place to put your money is not in risky assets personally.

Josh Hadley 00:12:34  And the reason why is because, like your most risky asset is your business, and your business is also the place where you could have the highest upside, the highest amount of ROI. Okay, but with that upside comes a massive amount of risk. So when you take distributable cash from the business and you’re trying to go set yourself up and grow Your net worth. The most important thing to do is look at it as though, hey, I’m not going to be taking on a bunch of risky bets for as much, you know, extra, I guess I would say, like growth rate as you can possibly find. But what you’re looking for is like safe, steady returns that will compound year after year, decade after decade. That’s what’s going to allow you to sleep well at night and know that even if the crap hits the fan, you are building wealth over the long term. So here are kind of like the four different buckets that I put distributable cash from the business into my personal assets. Number one, life insurance.

Josh Hadley 00:13:29  Now this is not sexy and I am not a life insurance agent. And by the way, all of this information is for fun and entertainment purposes only. Do not take anything for financial advice or for tax advice or anything like that. This is just me sharing my playbook. I’m just some guy on the internet that you’re listening to right now. But the most important thing here with life insurance is that this is protected against creditors. All right. So if my business explodes and I have to go bankrupt in the business, or if somebody sues the business. Right? Or something like that. Guess what? If my assets are in a life insurance policy. And now this also depends on what state you live in. But for me, like it’s untouchable. Okay. And so that is an important aspect of like why I’m going to invest money into life insurance. In addition to that, another thing that I’m going to do is I’m going to know that it can grow. It has there’s a lot of different life insurance policies, by the way, if you want one of my best recommendations, go check out the podcast episode that I did with Mike Olson.

Josh Hadley 00:14:31  He is somebody that I have worked with in the past and has a great perspective on all of this, but here’s the key thing. I get to participate in market upsides. But also I don’t have to participate in market downsides. And my I guess my cash in that, investment is going to grow year over year. All right. The other benefit of this is if if the crap ever hit the fan. Guess what? I can take out a loan against the policy value or my cash value. In that policy. I can take out a loan and loan it back to myself, and I’m basically paying myself that interest. So again, this is a really good like just downside protection mitigation risk. Really easy one to set up. So that’s number one where my money goes. The second place where my money goes is straight into an S&P 500 Voo index fund. And the reason why I’m doing that is nah it’s not overly sexy. I’m not picking a bunch of like crazy stocks or anything like that.

Josh Hadley 00:15:24  But guess what? Over the past few decades, like it’s it’s returning that eight 9% return. And it has done so for a long, long period of time. And so I know that I’ve still got 30, 40, 50 years to go. And so if that’s the case, I’m going to be able to continue to compound year over year over year, even though I may not be experiencing 50% returns on my money, a steady 9% compounding growth rate on my money Year after year produces like millions of dollars at the end of the day. All right. So that’s a place where it goes. In addition to that, let’s add a few caveats here. I always max out and fund that Roth IRA account because guess what. Tax rates are only going to increase, right? If you just think about it, do you think that tax rates will decrease over the next 20, 30 years or are they going to increase? My bet is that tax rates only increase, especially those that have sizable net worth.

Josh Hadley 00:16:18  Okay. And so if I invest into a Roth IRA, I’ve already paid that money. I’ve already paid the taxes on that money. And my money gets to compound tax free. And when I when I pull it out at my retirement age, guess what? I also get a pull it out tax free. So I’m a big fan of that. So again. But then in that Roth IRA account I’m just investing into Vo. Slow and steady wins the race here with that. Now if you want to really like make things that much more fun or complicated, so to speak, you could look at like putting some of that investment into actual like 401 accounts that you can set up. Even though you’re a sole business owner, you can set up retirement accounts for yourself, a Sep IRA account. So if you’re not familiar with that, I would definitely have you go check out my podcast interview that I did with Do Wealth here as well. And we talked about like the different assets and places where people should, you know, a you could mitigate your taxes in a single year, but also like set yourself up for compounding growth in your net worth for decades to come.

Josh Hadley 00:17:18  All right. What’s the third bucket that I invest in? Well, this is real estate. And I want to make a big caveat here. For me, this real estate is not Airbnb vacation rental, short term rental properties. And the reason being is because guess what? Those short term rental properties, those are basically new businesses. And all of my time and effort should be focused on my main primary business. That’s where all the risk is, and it’s where my biggest upside is. My biggest upside is not in like figuring out the new Airbnb market. Am I going to have 100% return year over year on on an Airbnb? If this is my first Airbnb, know there are actual people where like their entire business model is based off of just running a bunch of Airbnbs, right? They go and buy them, they fix them, they flip them. They make them fun and entertaining so that they can command a premium price. It’s like, that’s a totally different business model. And so I see way too many like especially e-commerce entrepreneurs that take out their money.

Josh Hadley 00:18:14  And then they basically just go start a new business even though they don’t realize it. And they’re like, oh yeah, I’m I’m doing Airbnb’s now and I’m like, great. More headaches for you, right? Because now you don’t have to just deal with like inventory, supply chain issues, Amazon issues, any of that stuff in the e-commerce space. Now you get a deal with government compliance on a city and local level of zoning permits and all of that stuff. Right. And then you’re also dealing with the people that come in and out. And yes, you could have a property management company, but even then there’s still crap that has to be figured out. So when I invest into real estate, number one, there’s you could just invest in REITs, right. Right. You could invest in those. Those are all over in the stock market. But I am a big fan of acquiring single family homes. Right. But doing so with somebody that is like an experience, kind of like either a fix and flip type of person that does like turnkey investment properties.

Josh Hadley 00:19:03  Those are my favorite. My cousin actually does that, so I invest a lot with him. And so I invest in these like turnkey single family properties, where it then gets managed 100% of the time by the property management companies. And so again, I don’t have tenants coming in and out every single week or weekend. Like, yeah, maybe a tenant churns every year, maybe every 2 to 3 years. That’s okay. And maybe a stove breaks and I have to say, yeah, fine, go replace it. But like that’s the level of involvement. And so for me that’s something that I’m able to build generational wealth year over year over year. That’s going to continue to compound over time. My fourth bucket and I’m actually going to add an extra bonus here. My fourth bucket is I will take maybe 10% of that distributable cash. And I will have fun with it, investing it into like call it speculative assets, right? This could be crypto. This could also be just some fun stock picks.

Josh Hadley 00:19:55  You know, back in 2020, my favorite stock pick at the time was Party City. Got absolutely crushed right by the market in 2020 because nobody was having parties. Well, I knew that parties were going to be coming back. So Party City I think went down to like 20 or $0.40 a share. I bought it there and then it like went up in value, I think to like 3 or $4. And then I was like, oh, I’m going to exit this thing. Fortunately, I did, because we know Party City is no longer in business. So but those are like speculative bets, right? And I made it out big on that one. But like, that’s so few and far between. I am not a day trader. I am not a stock picker. But I do enjoy the occasional like, hey, let’s go play some bets on these stocks. I think I know a thing or two about this market or something like that, and maybe I can have some upside there.

Josh Hadley 00:20:39  So that is a place where I will invest. Now here’s kind of my bonus opportunity for you. This is a place where I’ve started to do more as of late, investing into oil opportunities where there are companies that will go drill for oil and you can be a limited partner in those. Yes, it does increase your exposure, possibly, but if you invest in those, there’s some massive tax benefits that come from that. And if they find oil right, you could be getting, you know, checks on like kind of like royalty checks so to speak on a monthly basis for those. And again, I don’t have to think about those investments. They just continue to grow month over month, year over year. I hope that helps set your mindset for where you should be taking cash out of your business when, where and why, and what to do with that cash when you do get it. But ultimately, if you found value in this, drop something in the comment. Leave a review on your favorite podcast platform of choice.

Josh Hadley 00:21:32  Whether it’s Apple or whether it’s Spotify. Leave me a review a rating there. Please share this with another operator, a friend. Maybe it’s a mastermind group that you’re a part of. Somebody else that needs to hear this. Spread the good word. That’s the biggest thanks that you could give me. And until next time. We’ll see you later.