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Entrepreneurs usually launch their companies so they can pursue their dreams. So, in the early stages of the business, it's understandable that some manage their companies primarily through gut instinct and intuition. But if a business is to grow, even the most visionary entrepreneurs must temper inspiration with accurate and effective planning processes—which start with proper management of cash flow and priorities.
If you want to grow, the first and most important step is a rolling quarterly cash-flow projection. For small businesses, keeping a rolling cash-flow projection can be tough because there are always other interesting priorities competing for your time.
As your business grows, you'll find that the discipline of collecting information to aggressively manage cash flow is often more useful than the projection itself, says John McGinnis, a board member at Templeton Kenly, an industrial hydraulic manufacturer in Chicago.
Once your key employees know where you are spending money and making money, they can make well-informed decisions about the future. Rather than blind intuition, you'll have hard, accurate data—without which no real planning decisions can or should be made. But many businesses don't take this step and miss payroll or a bill payment.
Planning is a difficult task. No single planning approach works for all organizations. Yet good planning and a clear understanding of how the key working capital components of the business are impacted by growth is essential. This will help maximize growth opportunities, minimize borrowing costs and improve relationships with customers and vendors.
Companies that don't plan or prioritize well are penalized by their banks and lenders. As such, you also need to set clear metrics and performance standards around key working capital components, such as accounts payable and inventory, and then strictly manage to the standard you've set.
That's why it's important to set priorities. Although your gut may tell you it's time to stretch, an accurate cash-flow projection helps you prioritize and avoid getting distracted by overly ambitious projects. When you're growing fast, it can seem like anything is possible. "It is easy to get seduced by blue-sky plans, but blue skies are high-risk compared to closing a bunch of smaller deals efficiently," says Tom Varvaro, CFO of ChromaDex, which supplies botanical reference standards to the pharmaceutical industry. "It is often more profitable to do the boring stuff well."
Varvaro is funding ChromaDex's growth organically. Even though priorities shift, he keeps one eye on the company's cash at all times. That way, he and his team know what they can afford to do at any given time.
But what to do if you are bored stiff by managing fundamentals such as cash flow? You could hire someone to track such information. Or you could streamline the fundamentals so you don't spend so much time gathering data or crunching numbers. It doesn't matter whether you manage your business from a tightly controlled spreadsheet or from a financial reporting software package, as long as you have the right information at the right time.
That way, when inspiration strikes, you'll know just how far you can stretch to capitalize on the next opportunity. Remember: Cash is king!