Just when you finally feel on solid footing balancing your rapidly growing sales with systemic increases in your ability to produce and fulfill, you’ll face the next small business barrier to scaling—the Financial Barrier.
Typically this will manifest in one of two ways (or for some companies—both!)
The first way it might manifest is as a cash flow crisis. Cash flow is a term used for cumulation of accounts receivable and accounts payable in your small business. In simpler terms, cash flow focuses on the cash inflow and cash outflow in your small business. Cash flow management is important, especially in a small business, because you need to make sure you have money for operating expenses on your business. The cash flow crisis caused by a business that gets sloppy as it is enjoying fast growth over a number of years, and it simply loses its financial discipline.
Collections stretch from thirty days to sixty or ninety days. Margins slip as companies just make poor financial decisions like over-investing in fixed equipment or facilities, or just over-hiring. And because they are not paying close enough attention to the numbers of their business, they find out after a significant amount of financial damage has already occurred.
The second way this barrier might manifest is in a financial record keeping mess. The company is growing so fast that it rapidly outpaces its accounting expertise and capacity and the financial bookkeeping and financial pillar of the company aren’t just sloppy, but they are just plain inaccurate. So the leadership team is operating on flawed information, making guesses.
This hurts the decisions being made, which in turn causes the company to radically under-perform what it could and should be producing.
Plus, now the owner doesn’t trust the financial information. This uncertainty about the exact financial picture turns into anxiety and fear on the part of the owner who becomes constricted and pulls back on the reins of the business.
This means the business is contracting at a time when if the business had good, solid, trusted financial data the owner would likely be pushing forward with smart, proven strategies to grow and scale.
Other ways the Financial Barrier can come up include a lack of a plan for funding for growth. Growth always costs money, and smart companies plan for funding that growth before they need it.
This barrier can also manifest in the form of poor financial controls which sadly can culminate in theft, embezzlement, or just plain dumb financial decisions. However this barrier arises, what is clear that you need your financial house in order to successful sustain growth over the long term.
Here is a quick 4-step diagnostic tool to help you understand and fix your cash flow issues (plus several suggested resources for you to check out to upgrade the Financial Pillar of your company.)
One of the most important lessons with respect to managing cash flow is this: The faster you collect from your customers, the easier it will be to manage your cash flow.
Most businesses carelessly fall into cash crunches because they let their receivables slip longer and longer before being paid. Not only does this put the revenue in jeopardy because the longer it takes you to collect, the lower your odds of getting paid, but the higher your collections costs rise, cutting into your margins. With a small cash reserve due to cash flow issues, this can become very problematic when figuring out how to pay for your overhead expenses and has the potential to leave you in bad debt.
That is why you need to do all you can to accelerate the pace of your “collections cycle,” the average time from the moment you have cash going out the door for “cost of goods sold” to the time you collect on the sale of that product or service.
Why this number matters so much in the context of diagnosing cash flow issues is it lets you see how your pricing is relative to your direct costs of production/fulfillment.
One common cash flow issue you can often spot in your gross profit margin is poor pricing. If this is a challenge for you, it will often become obvious when you look at your gross profit margin, whether on a global perspective, or product by product, or customer by customer.
Or maybe you discover that you need better cost controls to reduce your “COGS” (either to reduce materials cost, overtime hours, wastage, expedites, scope creep on fixed fee pricing, etc.)
Sometimes the only way to solve an acute cash flow challenge is to rigorously go over your expenses—line item by line item – and make the painful cuts.
The big picture strategic decisions you make that cost cash have a real impact on your cash flow.
Further Resources to Help You Effectively Deal with Cash Flow Challenges:
Keep in mind, business cash flow problems can be a serious problem and threaten your ability to stay in business if you choose to continue to have poor cash flow management. Here are some resources that will help you have a healthy cash flow to help you further your business success:
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