WE HELP COMPANIES
MANAGE + OPTIMIZE
Every bit of profit should be kept from your hard-earned sales.
Wide eyed and mystified, on a beautiful southern California day, I walked into my first finance class at USC and read the first line of the required textbook - and practically spit out my iced tea in bewilderment. The class was Entrepreneurial Finance, and it read something along these lines: “80% of businesses will grow themselves out of business.” My oh-so-naive initial thought: “You’ve got to be joking me. There is no way! What business can’t keep up with growth. LACK of growth is the bigger issue.”
Cut to 10+ years later, and here is a list of responses when prompting business owners what their biggest obstacle is:
“I made more money at the end of the day when I was a smaller business”.
“I’m thinking about shutting my online store down for a day. This is just too crazy to keep up”.
“In the past 3 years I doubled my sales, but you know how much profit we have now? HALF of what I made back then.”
And the statement that particularly shoots daggers through the hearts of finance and operations enthusiasts, the ultimate coup de grâce:
“I had to turn away business.”
All businesses want to grow, but with growth comes an entire onset of new challenges.
The main challenges:
1) Financial risks - increases in expenses, increases in investment amounts, more tied up capital
2) Operational risks - need for additional staff, more materials, larger warehouse space, innovative systems for business operations like inventory control
If the two above risks are not proactively managed, you’ll find yourself along the same lines of the quotes listed above.
Here is how to avoid falling into that trap:
How do you know if you are heading there? Compare your top line (sales) to your bottom line (profits) - are you trending downwards with your profits even though your sales are trending upwards? Are you only able to pay yourself the same salary (or even less) year over year without putting the business in jeopardy? If you are saying yes to the above, you are going to want to keep reading:
How to Manage Growth
Put the emotions aside - it's time for analysis now. Here are the steps:
- Get a hold of your expenses by shortening the cash cycle. What is a cash cycle? It represents the time it takes for money you spend today on expenses (like inventory, materials, staff, etc) to return BACK to the business (when customers pay you for your product / service). Put more simply - the average length of time from spend to receipt.
- Example: a T-shirt company. Day 1 is buying the raw cotton + polyester blend materials. Day 60 is the purchase your online customer makes to buy from you. In between these days, the following tasks occurred: you designed the shirt, cut the materials, sewed the shirt, took a product photo of the shirt on a model, photoshopped the photo, wrote the marketing description for the shirt, listed the product online, advertised the shirt. From day 1 of the first expense to day 60 when you made the sale means your cash cycle is 60 days.
- Introduce new time-saving and money-saving techniques to finance and operations areas that you haven’t implemented before
- Redesign current processes such as how you handle inventory, what are your fixed and variable monthly expenses, money spent on staff recruitment / hiring
- Budget the sales and expenses ahead of time so you don't get caught with unexpected costs that catch you off guard. Know exactly how much money you have coming in, and going out, for each month at any given time
There is good news and bad news:
Good news: These steps above are relatively straight forward and totally possible to implement. It is very feasible to start quickly and start making a dent in those diminishing profits!
The bad news: These aren’t quick band-aid fixes you can put in haphazardly and hastily. These will need some real analysis, and you / your staff will most likely not be able to do it by yourself - to attempt to do so may result in a waste of time.
So here is what you do. The best approach is to seek external expert advice. When you hire an expert in finance and operations, ask them to explain what they are doing in detail - how they are doing it (don't be shy about asking for thorough explanations, either) - and that way you can still remain in control by following up with them, time and time again.
The most important thing is to take action - now that you have sales growth, don’t waste time! Growth won’t stay forever, grab that profit while you can so you can be prepared for whatever the business climate brings in the future!