Posts Tagged ‘cash flow’

Are You Growing Too Fast?

Wednesday, October 3rd, 2012

We routinely tell business owners that a company can get into trouble when it’s growing just as easily as it can at any other time.

I’ve grown used to the looks of disbelief that come our way. And to the predictable question, “How can growing be a bad thing?”

The answer, of course, is that growth isn’t bad in concept. Like everything else, it’s the execution that is either good or bad; it’s how the owners manage what’s going on.

There was a good example of how things can go wrong – and how badly wrong they can go – in the HBR last month.

A family owned printing company saw sales hit an all-time high just as everything fell apart in 2008. The problem was that the bottom line wasn’t growing and they were eating into their line of credit because cash was tight.

All it takes is a decline in margins caused by price cutting – to drive an increase in sales – and a slowdown in customer payments because credit rules have been relaxed (also to bring on new customers) and cash becomes a problem.

In a mature industry like printing where the products have become commoditized, price cutting becomes a way of life.

It’s also a business in which you have to understand and watch costs carefully. Under-estimating a job can turn it into a loser quickly. And so can making a mistake and having to re-run the job.

How do you avoid getting into trouble while growing?

1. Don’t “buy” new business. Rather than compete on price, find ways to add value. Or offer “de-featured” versions of existing products and services at a lower price point.

2. Get a really good understanding of your operating costs and how they react when sales increase.

3. Keep a tight grip on inventory (if you have one) and Receivables (and most companies have those). Move quickly to get rid of customers that don’t pay on time.

4. Spend time getting to know your cash flow and how it is affected by growth. Remember – cash is king. A profit is good but you can’t take it to the bank. They only accept cash.

5. Don’t rely on your Income Statement to tell you what’s going on. It can tell you what has gone on – but it can’t give you a glimpse of the future. Only a cash flow forecast, your aged receivables, inventory turns and metrics like these will do that.

This is hardly an exhaustive list but it covers most of the basics.

One of the bosses I worked for never let us talk about sales; he insisted we talk about profitable sales. I thought he was nitpicking at the time but, in retrospect, I was young and foolish and he was much more seasoned and savvy.

Guess how we talk about sales now.

If you enjoyed this post you’ll also enjoy 5 Tips To Improve Margins and The Bottom Line…..

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6 Challenges Fast Growing Companies Face

Tuesday, August 28th, 2012

I’ve mentioned Inc. magazine several times before. It’s a great resource.

There’s a well-researched article in the current issue about 6 challenges fast growing companies face. They’re all about execution – and if the owner doesn’t deal with them well any one of them can be fatal.

1. Your business outgrows its staff. One or more hard working, loyal employees who had the skills required to make a great contribution when they joined the company can no longer deliver. Owners are torn, knowing that the business wouldn’t be where it is without Joe or Mary – but that they just can’t cope and are hurting the company now. The solution needn’t be just to let them go but the owner needs to deal with the situation quickly and honestly.

2. You wait too long to hire.  A classic dilemma. Hire people before you need them and you add to overhead and risk having to lay them off if the orders you thought were coming don’t. The alternative is to risk service and credibility if the business does materialize. One solution – hire all-rounders who you can train and slot into more than one position.

3. Your business lacks the right systems. Two potential causes here. Either you don’t implement processes and systems quickly enough or the system you chose doesn’t work as advertised. I know which one frustrates me most – the latter. There’s nothing worse than dealing with implementation problems and delays – so have a solid contingency plan in case it happens.

4. You run out of money. We’ve said it before, and I’ll say it again, the most important document for a business owner is a cash flow forecast. Keep it up to date, study it often and it will provide the information you need to stay out of trouble. Because growing companies have to invest before invoices are cut, never mind paid, they become less, not more, liquid.

5. You can’t keep up with demand. This is the most dangerous point for fast growing companies according to the article. The owner takes on debt to finance additional capacity – or people – and the demand doesn’t appear. According to the author the best solution is to manage growth so that it happens in small rather than large increments. But that’s not always easy to do.

6. The problem is the owner. If you’ve built a company – i.e. been successful – why would you have to change? That’s a reasonable question. But I notice, after 15 years of working with business owners, that the ones who grow their companies successfully are the most open and willing to change themselves. If the business can outgrow an employee, why can’t it outgrow the owner?

You can read the full article 6 Classic Ways to Crash Your Company here.

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The 2 Truths Every Business Owner Has To Face

Tuesday, May 3rd, 2011

There are 2 truths every business owner has to face.

You can’t sell a business which isn’t successful. No one’s going to buy a company that hasn’t consistently produced good profits and cash flow – which they believe will continue after the change in ownership.

No one is immortal. So, every privately owned business is going to be sold, to the next generation or a third party, at some point in time.

Why some owners ignore the second truth.

Building a successful company requires vision, developing a flexible strategy and actually implementing that strategy. Then there’s finding funding, hiring and keeping good people, dealing with customers and suppliers, managing/leading and I’m only getting warmed up…………………..

When building a successful business is totally absorbing and fulfilling why would you consider selling? When all of your time and effort is focused on dealing with what is happening now, thinking about an exit strategy seems irrelevant.

Here’s another reason. While all business owners start their companies because they have an idea they think is a winner – their baby – the people who currently own businesses come from at least 2 different generations. And with this, as with everything else, each generation views things differently.

Many older owners – if they even think about it in these terms – didn’t get into business for the capital gain at the end of the day. They got into it to provide an income for their families over their working life time and to build something tangible.

However, younger business owners – those in their thirties and forties – are more likely to be focused on selling before retirement age and doing something else with the money they make on cashing out.

Why you can’t ignore the second truth – especially if you’re older.

If you’re older you are, by definition, closer to the end (however you define it) of your career. And we know that a large number of Canadian business owners are closing in on 65 or 70 – or more. We also know that the majority of them haven’t begun planning for succession or a sale.

This is bad news. Here’s why.

If you build a successful company but make no plans for your exit you destroy the value you’ve created. It’s only a question of the degree to which you do it.

It’s not logical to end a career spent laboriously creating value by doing something that gives that value away.

So if you are an “older” business owner – or if you know someone who is – do something about it now.

It’s not too late – but it will be very soon.

If you’re not sure where to start speak to us – or others like us.

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