In this episode of the Ecomm Breakthrough podcast, host Josh Hadley tackles a critical question for e-commerce entrepreneurs: when to pull cash out versus reinvesting profits. Using two contrasting entrepreneur stories, he illustrates the risks of over-reinvesting and maintaining excessive working capital. Josh advocates for keeping businesses lean by maintaining minimal working capital while diversifying income outside the business. He emphasizes that since most e-commerce businesses never achieve an exit, building financial security externally is essential rather than betting everything on a potential buyout that may never materialize.
Bullet Points:
- Decision-making in e-commerce regarding cash withdrawal versus reinvestment
- Importance of balancing working capital for business efficiency
- Contrasting stories of two entrepreneurs with different approaches to profit management
- Risks associated with continuous reinvestment in a changing market
- The concept of distributable cash and its significance for financial security
- Impact of large working capital on team discipline and project testing
- Necessity of diversifying income streams outside the business
- The reality that most e-commerce businesses do not achieve an exit
- Strategies for managing capital wisely in e-commerce
- Encouragement to share insights and experiences with fellow entrepreneurs
Timestamps:
00:00:00 Introduction: To Reinvest or To Distribute?
Josh Hadley introduces the episode’s core question: when to pull cash out of an e-commerce business versus reinvesting it.
00:01:09 Story 1: The Reinvestor’s Regret
An entrepreneur reinvested $5 million in annual profit for growth, but a market shift left him without a buyer.
00:03:40 Story 2: The Problem with Too Much Capital
Another entrepreneur learned that leaving too much working capital in the business led to undisciplined spending and ineffective project testing.
00:05:35 The Benefits of Distributing Cash
Distributing cash allows for income diversification and keeps the business lean, hungry, and scrappy, preventing complacency.
00:07:28 Why Diversification is Crucial for E-commerce
Most e-commerce businesses never exit, so entrepreneurs should prioritize diversifying their income outside of the business instead of perpetual reinvestment.
Links and Mentions:
Tools and Websites
“Amazon“: “00:03:15”
“Dew Wealth“: “00:06:35”
Podcast Episodes
“Ecomm Breakthrough Podcast“: “00:00:00”
“Episode with Bryce Keffeler from Dew Wealth“: “00:06:35”
General Concepts
“Distributable Cash“: “00:03:15”
“Working Capital”: “00:05:35”
Transcript:
Josh Hadley 00:00:00 Today, I want to dive into when the right time is to actually pull cash out of your e-commerce business, and when it might be wise to keep reinvesting into your business. My name is Josh Hadley. First and foremost, I’m a man of faith. I’m a husband to a beautiful wife and a father of four children. I’ve been selling in the e-commerce space for over a decade, doing over $20 million in annual revenue and doing multi-millionaires on channels such as Amazon, TikTok, shop and Shopify. And I am also the host of the number one business strategy podcast for ecommerce entrepreneurs. And that is E-com breakthrough. 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. So today I want to dive into kind of the frame or the two decision points that are, hey, you should pull money out of your business and diversify your income versus, hey, no, you should put all of your money and reinvest it back into the business, because that is your best investment vehicle.
Josh Hadley 00:01:09 That’s going to be your highest return. I’m going to share with you, kind of like my thought process. And my thought process comes on the heels of hearing two very different stories. That’s been very, very applicable. And I think that it applies for 99% of the audience that is listening to this right now. The stories go like this. There was one entrepreneur who they were crushing it. He had a business that was spitting out about $5 million in net profit every year. That’s a good chunk of change. But he was ambitious. He had even bigger goals for the business. He wanted to see if he could actually push this thing and maybe have like $1 billion buyout right now. Does that happen? Are there billion dollar exits? There certainly are. We’ve seen them in the news. But I would argue the reason why they’re in the news is because, like they don’t happen very often. Okay. So guess what? He keeps plowing money back into the business by hiring more talent, making the business that much more complicated.
Josh Hadley 00:02:07 And as he did that, his, you know, his net income or profit was, you know, falling down was actually going backwards because he was reinvesting for the future, reinvesting for growth, growth, growth, growth inside of the company. And it’s true. The business did keep growing. Like they kept hitting different revenue milestones. However, guess what? When it came time to exit and they were like, hey, we kept we kept doing all of this. They did not find a buyer that actually wanted what they built. And the market had then sent shifted. They were actually in a declining market at that point. And so originally they had a bunch of tailwind like market upside. They were crushing it year over year. And then it started to fall backwards. Like there just wasn’t as much demand in that market anymore. And so the lesson learned that he shared was, had I taken that $5 million that I was getting almost every year and just put it into Amazon stock, I already would have been a billionaire if I just would have done that ten years ago.
Josh Hadley 00:03:15 And I kept putting all of my money from the net profit of the business just into Amazon stock, and just let the business coast just keep spitting out $5 million. I would have achieved my goal, but in a very different framework. So maybe he wouldn’t have been a billionaire, but he at least would have been worth like a few hundred million dollars. And so that’s the principle there, where distributable cash can be one of the most important metrics in a business. Sometimes it’s not all about putting all of your eggs into one basket, because what if that one basket never comes to the fruition that you once hoped that it was going to become? The second story goes with again, another entrepreneur who had said, hey, yes, I’m going to keep reinvesting in growth, growth, growth, growth, growth. And so I’m just going to take very, very little salary out of the business. Now, it’s true the business did continue to grow. However, guess what happened? What he learned is that when I give my team a good amount of working capital and leave it in the business, somehow it just gets consumed and sometimes it gets consumed by projects that don’t end up like actually producing revenue.
Josh Hadley 00:04:29 And so here’s what happens because there’s this good cushion of working capital. The testing hypotheses or special projects that get added into the business aren’t as robust. Because even if we’re wrong on this test, it’s okay. We’ve got another million dollars that we could light on fire and test this thing out. But guess what? If you constrain the business by actually pulling money out of the business now, leave enough working capital to keep the lights on and keep growing, obviously, but not a war chest of working capital to where the team’s like, oh yeah, we’re sitting in a really good spot, almost. You want them to a point where it’s like, oh yeah, it’s workable. We can do this thing. But like we can’t, we can’t mess up with many of these tests. Like we kind of have like a few options here, and the bar just gets really high for the use of that capital. And that was his overall takeaway is like, honestly speaking, distributable cash can be massively beneficial to your business in those two instances.
Josh Hadley 00:05:35 Number one, it allows you to go diversify your income so that you can sleep better at night and not have all of your eggs in one basket. I’m a big proponent of that, but I’m an even bigger proponent of not starving the business, but making it so that we still have to be scrappy. Because as the business continues to scale, if I just leave massive amounts of working capital inside of the business, it allows people to sit comfortably. It allows people to think, oh, if I make a mistake, it’s not a big deal. But instead you want to keep that hunger alive inside of the business. And that’s what I’ve done throughout my entire decade in the e-commerce space. I have always wanted to see as minimal working capital that I necessarily need in my bank account, and the rest of it gets diversified. And if you want to dive into, you know, where have I invested my capital? Go check out some of my podcast episodes. I’ve got two, one with Bryce Keffeler from Dew Wealth.
Josh Hadley 00:06:35 We talked about different ways and smart tax strategies as well that you should deploy. But then we I also recorded a personal episode of the different places where I will go invest my capital, but that is one of the most important things. As an entrepreneur, you are taking massive bets. You are the person and as your business continues to grow, you’re making bets on a half $1 million purchase order for inventory. That’s your money. And it’s those risks that you are being compensated for as an entrepreneur. And so not only do I see this as like a important thing to do as a CEO to sleep better at night, but I think it’s also the right thing to do for the business to not allow the business to get fat and happy, but to continue to stay lean and hungry so that it continues to fight for, you know, efficiency and to produce meaningful results. So this is a short episode, but I wanted to just like, set that framework for anybody that’s thinking like, how much actual working capital should I leave in the business? Do I continue to reinvest in the business in perpetuity and hope for an eventual exit? Look, I would argue 95, if not 99% of e-commerce entrepreneurs will never exit their business like the stats are that high.
Josh Hadley 00:07:58 So if that’s the case, you might as well start building your diversification outside of the business and not plowing everything back into it. If you found value in today’s episode, make sure you go share it with another operator who needs to hear the same message. Drop it in your mastermind group, drop it in a slack channel, share it with a friend and leave me a review. Choose your favorite podcast platform of choice and leave me a review. That would be the greatest. Thank you that you could give me. And until next time, good luck!
