Going For Growth? Be Financially Strategic
Generally, American companies – and Americans themselves – are nuts about growth. In fact, our entire financial system is set up to measure growth specifically – to the exclusion of virtually all other measurements.
We like growth, too. But it has to be profitable growth. Sadly, growth and profitability are not always roommates, especially if good financial strategy is missing.
So, how do you develop a strategic mindset around the financial part of your business?
CREATING THE FOUNDATION FOR SMART FINANCIAL STRATEGY
Start with the Basics: Financial strategy is forward-looking. But to look forward with confidence, you have to know where you are. Financial statements let you see. The basics are monthly income (P&L), balance sheet, cash flow, and aged accounts receivables and payables. Accuracy and timeliness is everything, so make sure these financials are generated no more than 15 days past the end of the prior month.
Look Ahead: With the basics in place, seeing the future is easier. Create a monthly budget and project out for at least one year, including projected cash flow, cash needs and monthly revenue (the trickiest part of the equation). Use your projections to budget human resources and also to make assumptions about SG&A expenses. The idea is to avoid surprises. Once you have a budget, don’t let it sit in a drawer. Measure your company’s actual performance against projections.
Project Cash Needs: It takes cash to grow a company. But most growing companies are cash-poor rather than cash-rich. When that is the case, you need to keep a careful eye on your cash needs and create a plan for addressing surprises. After all, life happens. We recommend basing cash needs projections on what’s happening NOW. In extremely cash-tight situations, conduct a weekly cash projection for the upcoming quarter.
Manage Your Cash: Companies are often surprised that we find cash in their operations. By tightly managing accounts receivables, accounts payable and inventory, we help companies improve liquidity, sometimes significantly. For receivables, establish credit guidelines for new customers and follow up on balances. The older a balance is, the harder it is to collect. For payables, time your payments to finance some of your cash flow from vendors. For inventories, keep close watch on what moves quickly and carefully manage items that don’t.
Measure Success: Establish key performance indicators (KPIs) for all business areas (including financial, operations and sales), and measure performance against a benchmark. KPIs should be SMART (Specific, Measurable, Achievable, Relevant and Time phased).
Too many business owners bring a strategic mindset to every aspect of their business except finance. They see their financials (if they see them at all) as somehow separate and irrelevant in decision-making. It’s this mindset that leads to growth absent of profit. But when business owners understand the role strategic financial management plays in success and profitability, they up the quality of their overall strategic game. The cracks in their foundation disappear. They are ready to grow.
**This story appears in the 2012 Women In Business Review Fall Edition. For copies, please contact Stacey@MyCity4Her.com**