Just like real estate is about location, location location, business success is all about management, management, management. Today we're going to talk about the importance of a company having a good balance of sales management, operations management and financial management.
I have two clients. Both want to grow. The first had a good operations manager, the finance manager is close to retirement and sales management was left to the CEO. The CEO was more of a visionary and sales management was not his strength. There were trends going on in the business which were missed by the finance manager and the operations manager tried to fill the gaps of sales and finance manager. This is not a good recipe for success.
My second client had a good finance manager. But, she wanted to work part time. Sales management and operations management were left to the CEO and it was a challenge to handle both of these with CEO duties. The company seemed to stall out in sales growth until a full time finance manager and sales manager were hired. It appears that 2014 is going to be a break out for this client.
Does your company have a balanced approach to sales, operations and financial management?
Here's a few questions to ask yourself:
- Who runs sales for my organization?
- Do we have clear goals and a clear differentiation strategy?
- Is our sales model delivering optimum results?
- Do we track sales against goals, weekly or monthly?
- Who's accountable for operational services?
- Is our delivery process achieving high results and client satisfaction?
- If process or systems require change, who handles that?
- Who evaluates industry best practices against yours?
- Do we have a budget?
- Who is responsible for managing results against budget and same month last year?
- Who reviews working capital and cash flow against requirements?
- Who manages all budget plan/reporting plan requirements to insure they're being met?
If there is one of these three that seems to consistently plague business owners most, it's financial management. Be sure you have all 3 M's addressed to insure business success.
Access to capital for business owners is the number one deterrent to hiring people which will reduce unemployment and improve our economy according to the most recent survey by the National Small Business Association (NSBA).
Dating back to 1993, the NSBA provides consistent data that shows a clear correlation to a business's ability to obtain financing with their ability to hire.
Over the last four years, this correlation has been exacerbated because almost half of the survey respondents failed to find access to capital whether its bank financing, credit cards or investors.
The consequences of this are dramatic when you look at the hopes of an economic recovery. Here's why:
The findings of the survey show...
- Hiring remains stagnant. The number of small business owners who project employee downsizing is up to 16%.
- While lending appears to be thawing, one in 4 businesses lack the capital needed to run their business.
- Economic uncertainty is the number one challenge for business owners, followed by regulatory burdens and health care costs.
"These items combined with the failure of Congress to adequately address the deficit and widespread confusion over ObamaCare, there are very few incentives to start or grow a small company," said NSBA chair, David Ickert.
So, how do we get business owners the capital they need to hire and run their businesses?
- First consumers have to start spending again. That won't happen until you reduce taxes and government spending. It doesn't matter what party you're affiliated with. Reagan did it in the '80s and JFK did it in the '60s. It's time for a change again.
- As consumers begin to spend again, businesses will hire to meet demand and unemployment will fall.
- With increased demand businesses will be expanding again, with more profits and will become more bankable.
- Banks will see healthier financials with decreased risk and be able to lend to meet the needs of expanding businesses.
- Banks have more government oversight than ever before with the Dodd Frank legislation. Less government intervention would certainly help the free market forces at work within the economy and make the lending and business climates more favorable.
Those are my thoughts. I would welcome yours.
Our business and finance news update is here. We hope you enjoy a few top articles discussing relevant issues to the business and financial worlds.
How to clean up your finances and keep your company in the black
4 money mistakes that entrepreneurs must avoid
I have some clients that believe in forecasting and evaluate where they are monthly. I have other clients that feel budgets at best are guess work and can't be relied on in any meaningful way. Where do you stand?
I would like to try and ask those who don't forecast to reconsider. You've heard the old adage that "failing to plan is planning to fail." While that might be overkill, attempting to plan for your cash flow needs can proactively pave the way for a smoother year.
I have a client in the manufacturing/distribution space who was planning to grow 20%. "Why 20%," I asked. "Because that's the amount I need to cover my costs and overhead" was the answer I got. His historical growth rate was about 6% per year. The industry outlook confirmed that number and GDP is expected to grow a little north of 3%. I told him forecasting much higher than that was potentially creating a year of disappointment if he failed to hit those numbers.
The assumptions you use are critical to your profit & loss and cash flow forecasting. Base your assumptions on factual, verifiable information. To make good guesses in your forecasting, be conservative and if you guess, guess low. Remember when you show this to your bank, you get brownie points for exceeding your forecast, not failing to hit it.
Assumptions for balance sheet presentations should be conservative and based on reasonable expectations of asset acquisitions in the coming two years. Of particular concern to lenders and investors are inventory and accounts receivable. Both are functions of sales, therefore carefully match your inventory assumptions with your gross income projections. Unless accounts receivable are typically large in your industry, do not project high balances.
Because cash is usually in short supply for small businesses, tying up this precious resource in excessive inventory or accounts receivable can be damaging. If you have a new business, you may want to refer to industry data from trade associations or a bank to help with your assumptions. The most important forecast for a new business is a cash flow statement.
While both lenders and investors want your small business to generate solid net income and have a strong balance sheet, cash flow is more important. It is from cash flow that you can repay loans or distribute cash to investors from profits.
Making valid financial assumptions, and explaining them clearly, can make the difference in receiving the funds you need or suffering rejection by lenders or investors. Often the primary reason for approval or rejection relates to your display of expertise in your industry. Perform your industry and competition research diligently and with a total focus on becoming an expert. You must then make financial assumptions based on this expertise -- and communicate this clearly in your business plan. Your financial assumptions will be challenged. Have knowledgeable answers ready for these challenges.
Do you want to be more profitable this year? How about working a little smarter instead of harder? If that's of interest, here's where I would start.
- Did you create a budget for 2014? How much profit do you want to make this year?
- In the past, I had a top down approach to budgeting, but I read an article in Forbes that said start at the bottom and work your way up, a much better approach!
I have a client who wants to make $500,000 this year, but when you add his overhead and other operating expenses he will have to grow revenues 20% this year to achieve his goal. GDP is growing at about 3% and his industry outlook and historical growth rate is 6%. How likely is it that he'll make that number? Not very.
Given that, something has to change. Better margins, cutting expenses or a combination will get him closer to his number, but he may have to back down on his profit expectation.
Second, do you compare your actual monthly performance against budget and against the same month last year? What's changed? There are drivers that are going on in your business that are either adding or subtracting to your overall profitability. You've got to get in touch with those to know which levers you need to pull to improve.
Here a couple of suggestions to find those value drivers:
- Are revenues going up or down? What's driving the increase/decrease?
- Do you have specific products or services that are more profitable than others? Can you change your mix in that direction?
- Are you adding incremental expenses, but not getting a return on those expenses? Can you make cuts to improve profitability?
- Review your cash flow statement in the financials provided by your CPA. What aspects of your business are generating/using cash?
This will be a refresher for many of you, but this exercise of making a budget and making monthly comparisons to budget and last year's performance is critical to keeping your business on track.
If this is an area of weakness for your business or you don't think you have the time or resources to dedicate to this area, contact us
. Here's to a profitable
Probably not. Banks believe that the best indicator of the future is the past. If you lost money last year, the bank thinks you’re going to lose money this year. Even if you are showing good trends in the interim, it’s unlikely that the bank will give you credit for just a partial year. You need to show a full year of profits to get the bank to go along. Here’s a story of how one my clients handled this situation.
2010 and 2011 were not kind to this client who wholesales products tied to residential construction. Seeing over $200,000 in losses for these two years left their company starved for cash. To make matters worse, the industry was starting to recover and my client was predicting an 18% growth rate. Growth requires cash they didn’t have. Mid year 2012, the company was showing nice progress and we showed financials to the bank only to be told “Wait until you have a full 12 months of profit and we’ll consider it.”
The growth created higher levels of inventory and receivables. The only alternative was to ride payables and have the owners put a little money in the company. However, after a full year in 2012, the company did have a 20% increase in revenue made a nice profit and had a $180,000 positive swing in earnings.
Finally in 2013, we were able to obtain a loan that consolidated the mortgage on the company building, paid off the existing line of credit with the previous bank and obtained $150,000 in additional working capital. The additional working capital and decrease in monthly payments was a huge help to the company cash flow. Problem solved!
Avoid the pain of asking the bank to increase your line of credit when you only have 3 to 9 months of improvement. Wait until you have a full year, then go see them.
Happy Friday! Enjoy some banking humor!
Among the many pressing issues you face on a daily basis is how do you get the financing from your bank to successfully run your business. Right? Banks merge and consolidate left and right. Your banker leaves and goes to another institution. You never seem to be successful at having a long term relationship with your banker. A bank, yes, but a banker? Not usually.
So how do you know if you're bankable or not?
What are your limitations? What makes you more bankable and what are you giving up for that? Having been both a banker and a business owner, I think I can give you a unique perspective on this subject.
Business owners by nature are risk takers. Bankers are risk averse. So, the two of you are going to approach borrowing money differently. Banks make a 5% gross profit margin and are usually leveraged abut 10-1. If your margin is that skinny and you have that much leverage, how much risk could you take?
Take a moment to put yourself in your banker's shoes and help him/her reduce the perceived risk in lending to your business. Cash pays back loans, period. Your cash can be sitting in AR or inventory, it can be distributed for taxes or to support your lifestyle. Bankers care about how much cash and cash flow stays in your business to pay them back. They're looking for cash flow of 130% of your required loan payments as a minimum. You can retain more in the company and reduce their perceived risk, but the trade off is that cash may be sitting in your company earning very little, if any return and could be employed to earn a better return elsewhere.
Don't ask your banker for unsecured credit unless it's very short term with a clearly defined event of how it will be paid back. In this tight, highly regulated credit environment, unsecured credit is a thing of the past. Pledge collateral and expect the bank to assign a margin requirement. AR 75-80%, real estate 80% etc. Quality collateral makes you more bankable because it gives the bank an additional source of repayment beyond cash flow. Watch your leverage. Leverage is using someone else's cash to buy stuff. Leverage magnifies gains and losses because you're using less of your own money, but there's a limit. If your total debt is more than 75% of your total assets, you're approaching too much leverage. If you have less than that, I could make a case you're under leveraged. The highest cost of capital you have is your shareholders' equity. Bank debt is your lowest cost behind vendor financing. You should be tipping 75%. That way youre bankable, but also using your cheapest sources of financing your business.
2013 is in the books and 2014 is upon us. I'd like to suggest you put your company through a year end process to see how 2013 compared to your previous year.
Here's a few questions to ask yourself for the year in review:
- Were sales up or down this year? How about gross and net margins?
- Did you have more or less cash in the bank? How about working capital?
- Did leverage increase or decrease this year? Are you less than 3-1 debt vs equity?
- How well are collecting AR and turning inventory? Did these improve this year?
More important than what happened, is why they happened. Peeling the onion back by asking the why questions will help you understand what's driving these changes and give you the opportunity to rework your strategy if needed.
Looking forward, will you grow this year? If so, how much? Growth always requires cash. Where will it come from? If you want to have more cash in the bank, where will it come from? Will you take out less? Will you collect AR faster? Sometimes that cash will come from a line of credit. Do you need to increase your line to handle that?
Putting yourself through a process like this annually will help you make better decisions because you have information that you may not have acquired otherwise. Sometimes we're so busy working "in" the business, we forget to work "on" the business. Here's to a successful 2014!
What process do you put your business through?