We have had the pleasure of working with a number of small business clients regarding their business success. We have found that in many cases, most of the small businesses are cash strapped. They spend hours each week trying to figure out which supplier they should pay next. We say “should pay”, because the small business is in a position that they need to prioritize who they pay first. They “need” to be paying them all but since cash is in short supply, they need to prioritize. The business owner also finds they are too busy to address all the issues currently on their plate. In all of the situations, they have indicated that they would rather spend their time trying to grow their business but things keep piling up.
Once we start conducting a deeper dive within their lives we find that they tend to share a common characteristic; that is; they have negative working capital. What this means is that the money they owe others within the next year is greater than the money they have in the bank plus the money they are owed (receivables). This is especially relevant for the monies due in 90 days being greater than the money in the bank plus what is owed to them within the next 90 days. This situation creates a significant amount of indigestion within the small business. It is has been said that more businesses die from indigestion than they do from starvation (lack of sales).
Once you find yourself in a weak working capital position there are only 3 areas to look at for improvement;
Reducing fixed costs is often the most hard to address since it often means moving premises, getting rid of equipment and vehicles. Reducing variable costs often mean laying-off workers or trying to look for a cheaper supply of materials. Both of these types of actions are quite painful, if not impossible, and once committed to cannot be undone. If you do find expenses you can reduce, great, but be careful not to reduce expenses that will cut of your sales efforts.
Often the easiest and quickest area to address is increasing sales. The food an organization is sales; it is the only thing that keeps a company alive. The ability to process sales orders and deliver on the promises made requires resources in terms of working capital, people and processes. Working capital and people are funded from profitable sales efforts. Seems like a bit of a catch-22, but in reality it is not. What really needs to take place in your business is prioritizing your spend to those items that generate sales. Most importantly it is about focusing on the sales that generate the most profit and stop chasing sales that take too much money and time to pursue.
For those who are lucky enough not to be in a position of poor working capital the best prescription you can take to avoid this unpleasant situation is to invest. Investment in marketing creates leverage for an organization by increasing market awareness about the company and its products and by generating leads for sales people to follow up on. Profitable sales generate cash. When we take a portion of the cash we earn (referred to as “retained earnings”) and invest in marketing the outcome of those efforts creates further sales growth which in turn then fuels company growth. Poor marketing and poor sales execution will restrict a company of generating the cash it needs to feed the company. It is imperative that a consistent, repeatable, reliable and predictable marketing and sales process is followed to ensure ongoing financial success.
RK Fischer & Associates