Generally, American companies – and Americans themselves – are nuts about financial growth. In fact, our entire financial system is set up to measure growth specifically – to the exclusion of virtually all other measurements.
We like financial 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 growth 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.
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.
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.
Taking Your Financial Strategy to the Next Level
Now that have the foundation, it’s time to get even more strategic. Here are several Advanced Financial Strategies forprofitable growth.
Finance Your Growth
There will be times when even aggressive cash management will not fill the cash void created by growth. Employ a rigorous forecasting process to identify cash needs based on certain assumptions about your business and its anticipated growth. Once you’ve identified your cash needs, develop a financing plan to meet them. Sounds simple enough, right? Yet, external financing can come from a number of sources and where you secure financing depends on both the maturity of your company and the value of its underlying collateral.
More mature companies can often secure debt financing through banks. But only if certain conditions are present, including the owner’s guaranty of funds, adequate collateral and positive earnings and cash flow. It is important that growth-focused companies have the right mix of equity versus debt (capital structure) in order to remain profitable while when growth through debt financing.Generally, new and emerging companies seek funding outside the traditional banking environment (unless there’s significant collateral in the business). These funds typically come in the form equity investments through Angels, Friends and Family and sometimes through Venture Capital. Securing funding in this way entails giving up a certain amount of ownership and control.
Set the Right Price
Once the financial foundation for growth is in place, it’s critical to measure the cost of various product and/or service offerings. Use this information in determining your pricing strategy. Pricing strategies can be based on volume of units/products sold, the value added from the service or product offering, or other means. The critical task is in setting up your reporting to include the measurement of product and/or service costs.
Invest in the Right Place
One of the biggest questions business owners ask is where to invest available funds back into the operation. Should we invest in equipment that will increase sales? Should we invest in streamlining operations? Or, should we add a sales person or other key function? A strong financial model will assist you in determining where to invest limited funds in order to obtain the highest return on investment and help you make “go/no go” decisions more strategically.
Grow in the Right Way
Expansion Opportunities: organic growth or growth by acquisition?
Companies need to continue to grow in order to remain relevant. And there are a number of ways to realize that financial growth. Typically, it’s a choice between internal (organic) or external (acquisitions) growth. Let’s look at both:
Organic Growth – A strong marketing/branding/sales focus can help leverage sales by increasing current market share through additional products and/or services, or by expanding geographically. Financial planning can assist you in determining how and when to scale your operations, what your start up costs are and what other costs will be incurred prior to realizing increased revenue, as well as the resulting financing need.
Growth by Acquisition – A company may also choose to expand by acquisition. This requires careful due diligence on the part of the company, its culture, customers, employees, pricing, cost structure and profitability.
Which growth option to choose, organic growth (internal) or growth by acquisition (external), depends on a variety of factors which are better evaluated by a strategic financial advisor.
“Going” for Growth
Companies planning for their exit for financial growth should consider several alternatives and need to base their decision on their specific issues and circumstances. Exit strategies include an internal transfer of equity (ESOP, buy-out), or achieving growth in the business through venture or private equity. Even an outright sale. Very careful planning based on a range of needs, both personal and financial, will assist the owner in making the decision that’s right for him or her and the company as a whole.