All of the 27 Challenges from the 7 Stages of Growth will show up for every company no matter their size. The value of the model is it helps a CEO focus on the right things at the right time. Periodically I have one of you ask about solutions to those challenges. Let’s start with cash flow challenges. See if any of these ideas can help you talk with your CEOs about how to address this challenge.
While this critical challenge shows up first in Stage 1 and again in Stage 2, I worked with a Stage 6 company where Cash Flow was their greatest challenge.
It’s a challenge that deserves the attention of every CEO no matter how large or small their company is. If a CEO has a plan to manage this critical challenge, he/she will stay ahead of their growth curve.
Cash is cash and revenue is revenue. They are not the same thing. More than one company has closed its doors drowning in revenue, unable to pay the bills. Managing cash flow means understanding how much money a company has every day or every week to pay the bills, which is paramount to keeping the company afloat.
A company never has too little cash to track. Business leaders who believe they’ll start tracking cash when they have some don’t understand the reality of cash flow management. There is nothing more important than understanding how fast the cash is coming in (or not) and how fast cash is leaving the business. In fact, understanding cash flow can help leaders make better decisions up to six months in advance. By paying close attention to how cash is flowing in and out of the business, a CEO can leverage even a small amount of cash, and sometimes, in the early stages of any business, that’s all there is!
I’m going to address two approaches that I promise will stem cash flow issues in those early stages of growth.
CREATING A PROFIT PLAN
A profit plan is simply a budget. People react negatively to the concept of budgeting, so I prefer this more proactive term. After all, that’s what running a business is all about! So why not plan to be profitable? The art of projecting how much income you will generate each month, how much it will cost you to produce your product or service each month and how much it will take to run your business each month is my definition of a profit plan.
Often, business owners have a less than enthusiastic reaction to this process. I recently delivered a Stage 4 X-Ray and the CFO told me during a break that a budget was not something in their near future. The CEO doesn’t feel it’s necessary. This company tracks the profitability of all projects, can quote their profit margins till the cows come home, and one of their top strengths was project management. All this would tend to let someone excuse the need for a profit plan. I disagreed and urged them to reconsider, which brought smiles to the face of that CFO. The jury is still out, but again, it’s early in my work with them.
The value of understanding how your company is doing against projections is simply this: A company with a profit plan will make better decisions. When you have a profit plan, each quarter you can look at your actuals and decide where you need to bring in more revenue or manage your costs better. Without a profit plan, you are flying blind.
If a company isn’t tracking their revenues and expenses by the month, and the CEO is keeping all the numbers in his/her head, while this might work when times are good (although I don’t advocate it), it is a disaster waiting to happen when facing a tough economy or a downturn in business.
A profit plan helps a company stop wishing for profits and start planning for profits. Help your CEOs see the value in creating their own Profit Plan.
MONITORING AND MANAGING CASH
In Stage 1 and Stage 2, business owners have a tendency to not want to get ‘caught up in the financial side of the business’. They want to be out marketing, selling, creating products or services that will bring in much needed revenue. If you run your own business, you may relate to this.
As the business owner, you have to understand the financials. You can’t give that responsibility away to anyone, especially in a Stage 1 or Stage 2 company. Yes, you can hire a bookkeeper to set up your books, pay people, send out invoices and collect receivables. No, you don’t have to do everything when managing your financials.
However, as the business owner you do have to know everything about the financial health of your company. CEOs who abdicate this responsibility usually don’t get the traction they need. I know CEOs who decided they didn’t want anything to do with the bookkeeping side of their business and ended up in debt because payroll taxes were never paid or taxes were never filed. A CEO who doesn’t take a strong and serious interest in the bookkeeping side of his/her business is asking for trouble. All business owners need to know where their money is going. Know who is paying and who isn’t. Know how much money is in the bank. Know how much needs to be brought in each month to make a profit. Know what the profit goals are.
Cash flow is an indicator of a business’s health and success. When you have a handle on your cash flow, a business owner makes better decisions. And making good decisions is just better for business.
The real value in managing cash flow is that it provides a realistic picture. You can’t wish money in the door. You may have to push out some payables if your receivables are weak for that period of time. By managing your cash flow, you eliminate surprises. Cash flow projection allows you to stay focused on the one activity you should prioritize: following the money! A business owner who is passionate about the financial aspects of his/her company will always have a company to be passionate about.
Your success. My passion.
Laurie Taylor, FlashPoint!
