01/09/2019
My practice is based on assisting small and middle market companies with their financial management. I have seen several business owners make similar management mistakes in managing their finances and I would like to share one of the most common errors.
Business owners tend to build capacity before they have a firm grip on the real potential of their sales volume. If sales do not materialize, cash flow becomes tight and I am called to help the owner fix the problem. The company is over burdened with debt or personnel costs that are not supported by the incoming cash flow. The owner now faces distasteful options such as laying off employees or giving up equity to bring in addition capital for the business.
The cash receipts of any organization must at least equal or exceed the out flow of cash otherwise the company will not survive. This would seem obvious, but it is all too easy for an owner to get stars in his or her eyes when they imagine the potential demand for their products or services.
The way to avoid this all too common error is to balance the timing of new capital spending or the hiring of additional employees with the timing of new orders. It is better to give existing employees additional hours, even if it means overtime, before adding new personnel until you know that an increased sales volume is really going to materialize and will be sustainable. I have often had an owner say to me, “But how will we handle the increase in sales?”
My answer is, “Good financial planning.” Equipment and people can be often be added quickly once the sales volume materializes. At times, capital equipment purchases cannot be avoided but before investing in new equipment or hiring additional people I advise my clients to think about stretching the available resources to meet the new demand. Projecting the point at which increased sales will require additional equipment or personnel is important. The projections be will never perfect, but they will provide a roadmap for the timing of investments in equipment and personnel. Doing this will avoid weighing down the organization with debt which it will struggle to pay or h