Last week, we talked about bucketing your cash. I mentioned we’d talk about strategic cash last week, but I didn’t tell you about my change of plans: we’re going to dive deep into CapitalOS.

We’re “skipping” over the last two weeks of CashOS and will revisit those after we talk about CapitalOS. Why the change, you ask? We changed because, as I started trying to frame out those weeks, I realized we’d hit on many of the CapitalOS concepts.

The reality is, cash rules and your cash systems should be made in the context of your capital decisions.

So this week, we’re going to talk about the last bucket of cash, Strategic Cash, and how that transitions us to CapitalOS, and what’s coming in the weeks ahead.

FROM CASH FLOW MANAGER TO CAPITAL ALLOCATOR

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You’ve followed the rules. You’ve built up a margin. Cash isn’t tight for once.

Now what?

Most business owners face this moment with a mix of excitement and anxiety. The money’s there… but the decision isn’t obvious. Do you take some out for yourself? Do you hire? Pay down debt? Hold it just in case?

This is where most business owners double down on their old ways… they make rash decisions and don’t create a real plan.

Instead, over the coming weeks, we’re going to use this moment (when cash builds up) to help you know how to make your first real capital allocation decisions.

This is where we move from CashOS (preserving & forecasting) to CapitalOS (deploying & investing).

From survival and rhythm (CashOS) to strategy and direction (CapitalOS).

Last week, we talked about the 3 buckets:

1. Operating Cash
2. Reserve Cash (emergency funds & tax reserves)
3. Strategic Cash

While we dug into the first two, we held strategic cash off for today.

If Operating Cash is your day-to-day fuel, and Reserve Cash is your insurance policy, then Strategic Cash is your investment fund.

It’s money set aside to make the business better, stronger, or more valuable.

Today, we’re going to lay the groundwork for how to use that strategic cash, which all has to start with a return on capital mindset.

THE RETURN ON CAPITAL MINDSET

As you think about strategic cash, you have to stop thinking as an operator. Instead, you want to start thinking as a capital allocator.

What does that look like? Start asking:

• What return can I expect if I reinvest in the business?
• What return would I get if I paid off debt early?
• What’s the emotional/financial ROI of taking cash off the table?

You’re not just running a company. You’re managing a portfolio. And your business is most likely your largest asset.

That portfolio needs a return.

It’s from this mindset that you start thinking about your strategic cash in four categories:

1. Reward the Owner
2. Reinvest in the Business
3. Strengthen the Balance Sheet
4. Invest Outside the Business

Each of these categories has trade-offs and should be balanced against each other. Let’s walk through each one.

REWARD THE OWNER

Too often, the owner is the first to make the sacrifice. The first to get cut back and the last to get paid. And while this can sometimes be needed, I’ve too often seen the owner making this sacrifice and jeopardizing themselves personally for the business over the long term.

The problem with that trade-off is that it not only puts you, but also the business at risk.

When I think about “rewarding the owner,” I think in terms of the following buckets:

1. Baseline Salary: to stop the sacrifice and cover your lifestyle comfortably
2. QOLDs (Quality of Life Distributions): a regular bonus for being the owner that is meant to be spent
3. Retirement monies: too many business owners have everything in the business and don’t plan for the day you quit working

This simple structure brings peace of mind and protects both business and personal life.

While some of these may be viewed as “selfish,” sometimes being selfish is the best return on your capital.

Say you forego vacations for 10 years “for the business,” then next thing you know, you’re headed to divorce or therapy because your wife loves vacations. While a goofy example, this is actually all too common.

Reinvesting in yourself and your family will actually increase returns in your business because of your renewed energy and focus.

REINVEST IN THE BUSINESS

These are growth-oriented moves that take cash and (hopefully) generate more of it later. This would be:

• hiring key or exploratory hires to help mature your business
• expanding through new product lines or entering new markets
• growing in your marketing and sales function to pore gasoline on growth
• investing in capital expenditures, whether maintenance spend or growth spend (more on this next week)

These are internal investments aimed at increasing growth and long-term cash flow.

Many businesses stop here. They focus on growth, growth, growth, and forego the risk management necessary to be a mature business. That brings us to the next: strengthening the Balance Sheet.

STRENGTHEN THE BALANCE SHEET

While reinvestment is about driving future growth, strengthening your Balance Sheet is about reducing risk.

These risk-mitigation or resilience plays give you stability, flexibility, or negotiating leverage. This, in turn, can help you have more sustainable growth in the future.

This looks like:

• Paying down or restructuring debt
• Improving working capital efficiency through changes in AR/AP/Inventory policies
• Building cash reserves for future investments or added resiliency

Our goal with these plays are to reduce fragility and increase financial breathing room.

Because the Return on Capital mindset we discussed above, we don’t just chase upside, we manage both risk and return.

We want to ask: “should I use my dollars to grow or reduce future downside risk?”

And here is the wild thing: sometimes reducing risk is the highest return move, especially in volatile or uncertain times.

INVEST OUTSIDE THE BUSINESS

You typically have entrepreneurs on two ends of this spectrum:

1. They spend too much time tinkering outside their business
2. They never consider anything outside their business

The goal is to find the right balance.

And, honestly, this is where the return on capital mindset shines through: your business may not always offer the best return.

To ignore that possibility isn’t being a good allocator of capital.

Sometimes you have to accept that lower return to keep the business going. But other times, you truly should invest outside the business.

Whether that’s to increase return or reduce risk will depend on your situation.

Some outside investment opportunities could be:

• Real estate
• Public/private markets
• Starting or acquiring other (unrelated) companies

In making these evaluations, we can’t rely solely on what the spreadsheet tells you. We also need to take into account the cost of distraction. I’ve seen multiple business owners with a successful business get distracted with a new thing, and lose focus on their winner.

So, our evaluation looks like part numbers, part emotion, and part personal preference.

Your system for evaluation should take into account all these things at the same time.

THE STAGING ZONE

Strategic cash isn’t a “use” of cash… it’s a staging zone for things to come. It’s where you hold cash until you’ve made an intentional decision about where to send it.

All capital decisions should pass through this area. That means no longer “o we made a little more, let’s buy this thing.” It’s “we made a little more, let’s set this aside to evaluate our options later.”

This pause is game changing when done right. It helps you stop making the flavor of the moment decision and start focusing on making the best return on capital decision.

We won’t get this perfect. But by moving from accidental spend to intentional spend, we can not only transform our business, but ourselves.

And this is why we’re digging into CapitalOS over the next 6 weeks.

This may be one of the most important transitions you can make.

Over the coming weeks, we’re going to dig into:

1. CapEx: The difference between maintenance and growth CapEx and how to make investment decisions with discipline, not impulse.
2. Steady-State Cash Flow: How to calculate the real cash your business generates after essentials, so you can plan distributions and reinvestment from a solid foundation.
3. Strategic Spending: Discover how to evaluate business spending through the lens of ROI (not just “do I have the cash?”) and shift from survival-mode decisions to confident investment.
4. The do’s and don’ts of Debt: We’ll help you decide when debt is a strategic tool vs. a dangerous crutch, for the first time seeing true cost and risk.
5. Long-Range Capital Planning: We’ll stop focusing on the next few weeks and start thinking about cash/capital 12–18 months out.
6. Cash & Capital Rules for Your Business: We’ll close by building a system of simple, enforceable rules for managing cash and capital, so you can lead your business with clarity and confidence.

If you have any questions or issues you’d like addressed, reply here and I’d be glad to see if I can incorporate it into the series.

It’s going to be a fun ride!

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