I’m Not Making Enough Money
Business owners we run into frequently complain that they are “not making enough money” or that they “don’t make as much money as they used to.” It seems to frequently happen by surprise, with no obvious culprits. Most of the time, this does not happen overnight. As a business owner, understanding what could be driving any deterioration is a vital first step. There are almost always a myriad of reasons why this is happening. So, what could be going on?
Bad Data and Inadequate Reporting
How much do you trust the data and reporting that your business produces? And if you do, is your trust warranted? As a leader, you must have visibility into your business, on an ongoing basis to monitor performance and make business decisions. This could be to course correct an issue or to double down on something that is working. Understand your assets, your profitability, your cash flow – not just at a snapshot, but in trends and compared to your budget. Do you have easy access to key trends and metrics? If your business had underlying anomalies occurring, could you readily spot them? What about underlying data, such as sales volumes, key customer sales, segment information or inventory detail. You should be a student of your business, at times seeing the whole map on the wall and at others using a microscope to peer into detail. If your financial statements and other reporting are inconsistent, historical numbers move around, or information simply is not available, how do you know that what you are seeing is not a false positive or a false negative? Timely, easily understood reporting is very doable for even complex businesses. Sadly, the underlying business could be deteriorating in spots, but poor reporting delays corrective action that could be eating into profits and cash. We see this much too often. Don’t let it happen to you.
Lack of a Cash Management Strategy
How well do you understand the flows of cash within your business? Are you proactively managing the cash you have, telling it where to go instead of watching it all too often fly out the door? If you can’t Being constantly pinched on cash is a real warning sign. Do you have a revolving line of credit that doesn’t revolve, and just stays static? These are warning signs of a lack of a cash management process. Are there significant occasional outflows that come at the wrong time, that create peaks and valleys? Cash, not profit, is the fuel in the gas tank of our business. Understanding cash flow is vital to the success of your ultimate journey. And growth can eat up cash quickly. Fast growing sales can cause accounts receivable to grow faster than collections for periods of time. And if you have to fund inventory and/or payroll in the process, it can result in a material crunch. While a bank will evaluate your ability to cash flow a loan, you should too. Too many businesses misjudge the amount of financing they need and can afford. To go a step further, this management and analysis does not just apply to history. The ability to create regular cash flow forecasting is a critical skill for any business to have. Can your business accurately forecast your cash flow? If not, get the expertise needed and start right away.
Adding Costs in Anticipation of Growth
Especially coming out of seasons of high growth, management teams can get comfortable investing into people, systems, services, and infrastructure for that growth to continue. Unfortunately, what happens when the growth slows, or even stops? What does your decision-making process look like in evaluating material added in areas of spend? If you are consistently spending in anticipation of growth, you can get caught on the outside of a game of musical chairs. We routinely see businesses where overhead spend is up 10% or more year over year, and sales are flat. That can erode profit rapidly. And worse still, it can require painful cuts to get back to desired profitability. This by no means suggests investment is bad. What is critical is the decision-making process behind what is spent and when. Are there leading indicators that can serve as a guide? What are customers or your salespeople saying? Are sales conversions slipping or perhaps the pipeline shrinking? Past growth is not a sure indicator of the future. The majority of sustainably profitable businesses are able to successfully toggle growth and investment over time. Are you able to do so consistently?
Death by a Thousand Cuts
Quite often, there is no one smoking gun that is causing profit and cash to shrink. It can ultimately be ¼ percent here, ½ percent there, but in total, those items can add up to a big problem. It is these small killers, like piranhas, who appear too small to have an impact, but can strip your business bare. With good reporting as discussed previously, creating access and insight into the right information, visibility can be gained to spot small changes. Maybe it is a small decline in margin month over month, or payroll creeping up ever so slightly. Marketing costs could be increasing with a smaller relative increase in revenue. What are you doing to not only spot but actively look for these small areas of bleed? The subtlety of the impact can make these profit eroders a difficult place to spend energy. If so, this is all the more reason to rely on trends over time, comparative analysis, drilling down to underlying data. Create a watch list and monitor it.
Your business is a living, moving organism. We have seen the hemorrhage, and also the very slow bleed. A business could suffer from either or both over time. Do you have the right resources around you to look for them? Are you and your team ready and able to make key decisions to course correct where needed? You don’t have to suffer from shrinking profits and cash flow. You do have to take proactive steps. And with the right resources, tools, and awareness, you can.
