A client with a small business wrote to me the other day to say that they are growing fast and should crack at least $1m T/O at the end of this financial year.
He then went on to say that it seems these days they were always pushing the end of their bank overdraft and struggling for cash.
He then asked what they were doing wrong and what factors should they look at to see if they were on or off track?
Well, I didn't know if they were doing it wrong, but the answer is in the next part of the last question.
This is not a question about finances, insufficient start-up capital, cash-flow or growth. It is, beginning and end, about Planning and Management. Everyone needs to consider this, because whilst some of you are doing some of it, probably no-one is doing all of it. Growth can be self-induced or market induced; it doesn't matter. If it's self-induced you have a lot more control over it, as against market induced growth which requires some degree of reactive management.
Either way, the end result is determined by the ability to manage. The question then becomes "manage what?"
Everyone should be using a form of Strategic Planner. Using a strategic planner in conjunction with your budgets and cash-flow projections prevents cash-flow crises because it gives you the ability to plot the implications of sales or cost variations upon the future state of the business.
You then have the ability to make management decisions based on those projected occurrences and to avoid any cash-flow crisis that could occur. The danger in these situations is that you either don't monitor closely enough or you put off making the management decisions until the implications can be decidedly unpleasant or at worst catastrophic.
At a time of high growth, and more so when it is market induced, it is also very easy to lose control of debtors so it is even more important to maintain strong debtor management as there is frequently an increasing bottleneck caused by cash required to build up input resources, as against payment for sold products. Whilst this can often be off-set by negotiating with suppliers for extended terms of credit prior to this growth period, it does not remove the need to monitor closely and manage strongly.
What factors to look for, a continuous and direct relationship between your strategic plan, budgets and cash-flow projections, and reality. When reality is tending to deviate, then take action, and at all times know where you are going.
He then went on to say that it seems these days they were always pushing the end of their bank overdraft and struggling for cash.
He then asked what they were doing wrong and what factors should they look at to see if they were on or off track?
Well, I didn't know if they were doing it wrong, but the answer is in the next part of the last question.
This is not a question about finances, insufficient start-up capital, cash-flow or growth. It is, beginning and end, about Planning and Management. Everyone needs to consider this, because whilst some of you are doing some of it, probably no-one is doing all of it. Growth can be self-induced or market induced; it doesn't matter. If it's self-induced you have a lot more control over it, as against market induced growth which requires some degree of reactive management.
Either way, the end result is determined by the ability to manage. The question then becomes "manage what?"
Everyone should be using a form of Strategic Planner. Using a strategic planner in conjunction with your budgets and cash-flow projections prevents cash-flow crises because it gives you the ability to plot the implications of sales or cost variations upon the future state of the business.
You then have the ability to make management decisions based on those projected occurrences and to avoid any cash-flow crisis that could occur. The danger in these situations is that you either don't monitor closely enough or you put off making the management decisions until the implications can be decidedly unpleasant or at worst catastrophic.
At a time of high growth, and more so when it is market induced, it is also very easy to lose control of debtors so it is even more important to maintain strong debtor management as there is frequently an increasing bottleneck caused by cash required to build up input resources, as against payment for sold products. Whilst this can often be off-set by negotiating with suppliers for extended terms of credit prior to this growth period, it does not remove the need to monitor closely and manage strongly.
What factors to look for, a continuous and direct relationship between your strategic plan, budgets and cash-flow projections, and reality. When reality is tending to deviate, then take action, and at all times know where you are going.
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