Tag Archives: cash flow

We are still in very uncertain times; headwinds are prevalent, and the daily headlines bombard the small business owner with plenty of potential worries. While talk of a recession is more frequent than it was six months ago, the impact should it occur, will vary by business, industry, and local market. So, what is a business owner to do right now other than just stay the course and power through? There are a few key headlines to watch and understand how they impact your specific business.

Inflation – Supply chain issues are nothing new and have played a role in inflation but there are multiple factors driving inflation overall. There are two areas in which to monitor the impact of inflation. First, what impact is it having on your customers and vendors? For example, some B2C businesses are seeing their customers begin to spend less on certain goods because of the rising prices of food and fuel. Other businesses feel the pain as well. Do you know what impact this could have on your business going forward? Second, understand how inflation impacts the inputs required to run your business on a more granular level. The inflationary outlook is still uncertain, and while broad, commonly measured inflation metrics like the CPI make the first page, it is important to drill down another level. Based on your business, what are prices doing for the raw materials you need and the goods you sell? Some commodity prices like steel have tapered off. Real estate prices in certain markets are showing indications of slowing, while food prices continue to rise. Yes, in general, goods and services are much more expensive than they were a year ago but watching trends on the specific goods and services that go in, out, and around your business is worth regular monitoring.

Interest rates – Rates are increasing. But just like inflation, interest rates is a broad term - what interest rates matter to you? The Federal Reserve raised its Federal Funds rate 0.75% this year. While not across the board, this has resulted in a roughly similar increase that most banks are charging their customers for corporate loans and lines of credit. Home mortgage rates have risen over 2.5% this year, while the 10 year treasury has risen 1.5%. All of these rates are expected to continue to rise but the magnitude is less clear. What impact do higher borrowing costs have on your business? Have you projected the financial impact to your P&L now and in the future? You should, especially in the case of a loan renewal in the near term. What about your customer? We know these increases will affect consumers and businesses. Could borrowing costs impact their ability to buy?

Consumer spending – The United States has been and will be a consumer driven economy. To date, consumer spending has held, as has the overall health of the consumer, in spite of the economic turmoil of the last couple years. It is not talked about near as commonly but a decline in consumer spending is often the canary in the coalmine relative to more serious economic slowdowns, and perhaps a sign for businesses to take more of a defensive stance.

Don’t let the headlines cause fear. Peer through the noise to the key information behind the headlines that affects your business, not just internally, but your customers and the downstream impact on your customer and supply chain. A ten second glance at the headlines may give you a different answer than the data that really matters for your business. Drill down, explore the potential impact, and take action accordingly.

Hopefully by now the year’s budget was completed months ago and tracking results against it is ongoing.  Unfortunately, for many businesses, once complete, a budget finds its way into a drawer to not be seen again until it’s time for a new one the following year.  As one of the many Budgeting Best Practices we recommend, a deep budget review at end of each quarter end can illuminate key learnings and present an opportunity to revisit assumptions.  Let’s discuss what you can learn and what to do from here. 

How Good is Your Process?

This quarterly review is an opportunity to assess the quality of the budget process itself.  If you are already significantly above or below budget in key areas, that calls into question the validity of the assumptions, the rigor of the process or worst of all, material execution misses.  This might invite a rethinking of planning going forward and can influence future decisions.

Don’t Keep the Budget Open

Some companies don’t finalize a budget until well into the new year, waiting to get the most accurate assumptions or seeking more information.  A budget process should be thorough, but equally important is having a budget in circulation.  It is way too hard to draw a line on when the information is finally “good enough” if there is not a time deadline along with the budget.  Perfection in a budget does not exist, planting a flag in the ground to serve as a true north is key.

Budget vs Forecast

While a budget can be viewed as a type of forecast, it is almost always an annual process that leads to a comprehensive operating output.  We are strong advocates of forecasting and reforesting throughout the year.  Every quarter is a great routine cadence that can be helpful for management planning, external uses like updating lenders or investors and evaluating what-if scenarios as new opportunities arise.  Some specific examples include:

• Forecasting higher revenue and payroll to support it if results to date are significantly ahead of budget (or possibly where cuts need to be made if revenue is off the mark)
• Evaluating new investment opportunities that arise throughout the year and the impact they could have on the overall performance of the business
• Contemplating payroll changes, such as departmental realignment in the wake of key departures during the year

This forecasting can be essential to provide confidence for management as well as external stakeholders as business evolves during the year.

Maintain Integrity of the Original Budget

Don’t change the budget!  Of course, there can be exceptions like a major error or calculation of a line item, but this is a very slippery slope.  Once a precedent is set, it is way too easy psychologically to manipulate numbers.  Constantly moving goalposts makes management ineffective.  While a company may argue we should adjust the budget because sales are already 25% ahead, what if the flipside were true?  If the company is underperforming and the budget is lowered, all that has done is changed expectations and condoned poorer performance. 

A budget is a critical planning and operational tool for any business.  Regular forecasting is an equally important and complimentary tool.  Both allow management to be better students of the business, improve operational performance and navigate the challenges and opportunities that arise over time.

Two seconds on social media or the television is enough to find heart wrenching images of the assault of democracy in the Ukraine.  Our prayers are with the families and freedom fighters that are standing up to violent aggression in their homeland.  This is a human story, but also has economic consequences for business owners to carefully pay attention to.

Yes, the stock market has been fluctuating wildly. That is one noticeable economic barometer. What underlies this is the potential of growing headwinds to the economy and its small businesses.  Oil prices have skyrocketed, meaning we all pay more at the pump.  But oil is involved in so much more than just fueling our cars.  Air travel could get more expensive, and the cost of shipping goods, which has already dramatically gone up in the last months, could increase even further.  Oil is also a key ingredient in so many products from plastics to packaging.  It almost surely has a bearing on the products you sell. Rising wages may not slow either. Utility costs and commodity prices will also be impacted.  And as this all compounds the inflation problem. 

There has also been talks of additional sanctions. Because of how the global economy is so coupled together, these sanctions could have a double edge sword. Their impact on Europe in particular, which depends on Russia for a significant amount of oil and gas, could cascade indirectly to the United States, creating even more disruption.   

So as a business owner, what do you do? 

1. First, understand the potential risks to your business. Pay close attention to current events and their byproducts, including the price of oil.  New sources cannot be started up overnight, and of course large suppliers like Saudi Arabia could pump more oil into the system thereby lowering oil prices.  But in the short term, the oil markets will be disruptive.  The volatility of oil prices has long been a proverbial canary in the coal mine, so as this continues, business owners should be on high alert. 

2. These are uncertain times, there is no reason to anticipate long term headwinds, but it may make sense to re-assess certain initiatives or growth plans short term. Perhaps even just a pause or tempering of expectations is warranted.  This is unique to each business, but all businesses should at least be asking questions internally on any potential negative impacts. 

3. Don’t operate out of fear. Some businesses owners are just exhausted and even paralyzed after battling Covid, inflation, and now the effect of a war oversees.  Educated, thoughtful action is critical.  The American entrepreneur has survived recessions, the Cold War, and commodity crises to name a few.    Stay strong and re-assure your teams. 

These are sad, troubling times without question.  We must never forget - democracy will win, capitalism will win, and small business will win.  You are the driver of the American dream that countries like Ukraine are fighting so hard to model after. 

We hear from business owners constantly that they are making profits, but don’t have a lot of cash at the end of the year to show for it. One big reason is that they are constantly investing in their businesses. This concept of “reinvesting” profits frequently occurs, especially in growing businesses where the expected payoff is down the road. What often gets overlooked however is the importance of where, why, and how that investment is occurring. And the answers can be key to accelerating growth and managing cash and the business overall.

Why does this matter?

A key word we stress is intentionality in actions and choices within a business – in simple terms, telling money where to go. And, next, what should that investment result in? Sometimes the investment is long term in nature, meaning the ROI will be long term as well, but it can also be short term. Sometimes an investment feels like a simple cost of doing business, for example hiring a new team member, such as an inventory manager. However, that role should improve control over inventory, meaning a reduction in potential losses or inventory shrink. It may be indirect, but there is still an ROI on that investment. Business owners need to understand where they are investing in the business, and what they expect to generate as a result.

The ability to go back and revisit what actually happens relative to what was expected is an essential learning tool for further decision making. This is also critical in evaluating options. Small businesses operate with limited resources, and are all about choices, sometimes tough ones. So let’s look at some key areas where investment occurs:

CapEx – An obvious area of investment is capital expenditures. This could be new equipment or an upgrade to equipment, IT, real estate or vehicles. This won’t show up in the P&L directly. So how can you clearly bucket and track these investments over time? And before an investment is made, what is the business case? Is that a better use of funds than others?
People – People are a huge area of investment in businesses. This could be adding a key executive or operating role to allow for better efficiency or scale. It could be in accounting to handle additional sales volume. Maybe it is time to add a role in house, such as HR. These are all areas of investment in the business. The organization of tomorrow has to be built, and that building means investment. And whether direct or indirect, how do these investments impact profits, risk and asset growth?
Marketing – Marketing comes in many shapes and sizes, so a distinction here is key between ongoing and an investment. Marketing such as Google Ad spends are clearly ordinary course of business expenses, however, perhaps the business is exploring a new initiative such as building out a email marketing system, maybe there is a sizable upfront spend in imagery and physical materials, or even engaging an outside PR firm. There is an investment involved here for a longer term payoff.
Inventory – Many businesses in growth mode make investments in inventory. This could take the shape of a decision to carry larger amounts of in stock inventory to meet growth, or perhaps a buildup of inventory in a new product. This is a key use of cash that should have a tangible ROI. And while this will likely become the new norm, that initial buildup is an investment, and should be viewed that way.
Systems – Systems can take a lot of shapes and sizes. This could be a new cloud-based software platform. It could be more rigorous processes, such as a new manufacturing line configuration or the material addition of checks and balances. That spend is an investment. And while some will generate profitability and efficiency, they often reduce risk, protecting future profitability and assets. What capital needs to go to developing or upgrading systems?
Expansion – Some businesses choose to expand, whether geographically, horizontally, vertically or just by product or service offering. This category can be a catchall for multiple of the categories above like people and systems in addition to start up costs such as legal, compliance and testing.

The keys are to identify where money is going, track it over time and view the overall business to understand investment versus normal operations. Ask the questions, understand where things are headed and make educated decisions and evaluations. Years of high investment will often show lower cash balances and often lower profits as well to be followed up by higher profits in future years as the ROI is realized. Without a thought process around investment, how do you know if an investment is working? Should you do more or less?  Can you tell the difference in your business?  You want to.