Growing The Business With Expense Controls: Growing The Business

Understand various way to grow the business and how growth impacts cash flow, when you are growing a business, lot of times business owners forget to monitor the expenses. When the expenses grow more than your revenues, that’s a big problematic for a business.

Use expense controls to manage the cash flow and generate operating profits, we want to make sure that as we are growing a business, we’re managing our expenses and managing our cash flow so that we can generate increase in profits that is consistent with the increase in revenue.

Understand how ratios can help to run a good business, using ratios to help us manage our expenses and our cost of goods sold which are the expenses that are directly related to the items that we are selling.

GROWING THE BUSINESS

The problems that grow as you grow your business

1. The cash crunch
2. Operations issues
   
3. People problems
4. Compliance issues

1. The Cash Crunch

The Use of Statement of Cashflows

• Categories of cash flows helps a reader understand the sustainability of a business
• Good if cash flows comes from operations
• If cash is used by operations consistently, business may not be sustainable

 

Cash flows

Each type of cash transaction is categorized into three sections, Operations, Investing and Financing

• Operations: net income and and changes in current assets and liabilities
• Investing: purchase or sale of property, plant, equipment, investments, or lending money or receiving payment of money from borrower.
• Financing: cash from shareholders, dividends paid, borrowing from creditors or repayment of funds to creditors

Net cash flows added to beginning cash should equal ending cash on the balance sheet.

Example – Statement of Cash Flow

New large contract:

• Great celebration
• Hire people and start working
• Billing 30 – 60 days to get paid
• Must pay employees before cash comes in

 

Many business owners do not understand growth and how it impacts cash flow, when we start generating revenue, having new large contract, we might have great celebration, we get a lot of revenues in, we hire people and than people start working. The business owners bill for the revenues and at the same time, the business owner have to wait to get paid for the billing for the revenue. They have to pay the people before they are actually going to collect the money that they billed for. This is something owners of businesses don’t realize it’s going to happen.

Must have sufficient cash to cover costs prior to receiving revenue, way to do this?

1. Sufficient reserves
2. Credit line
3. Bank loan
4. Partner or sale equity

That’s why it’s good to forecast your cash flow just so you can see how the money comes in and the money goes out. The money may go out before the money comes in for the revenue that you’re earning. So particularly in some states, it’s really critical to make sure you pay your employees on a timely basis.

How to deal with this situation?  

Emphasize the importance of reserves and need to make sure the owner of businesses have cash to cover their costs that occur prior to getting the revenues, prior to receiving the cash from their’s billing. When we say reserves, let’s say six months of reserves, or at least 2 – 3 months reserves and recommend ideally business owner would save up to six months cash reserves.

What are some alternative ways to build a business cash reserve for the financial security of business?

• Set a monthly target, when sales are booming, it is best to keep your feet firmly on the ground if you are going to build a cash reserve, take a prudent approach to expenditure, even when the profitability is high and formulate contingency plans to get you through unexpected downturns in business. You can always reinvest when your cash surplus exceeds your targets.
• Start renegotiating your contracts with suppliers, can be an effective way to reduce costs and improve the financial security of a business. Approach the supplier in a positive framework, present a solid case for keeping to current or reduce prices or improving quality. If you approach the supplier in a positive framework, it can help establish trust and rapport, and show that you are willing to work together to find a solution. Explain to vendor why you need to make changes and and what you hope to achieve, listen to the their perspective and concerns, and acknowledge their value and contribution, avoid blaming or accusing your vendor of any wrongdoing. Make sure to thank your vendor for their cooperation and understanding, provide feedback and recognition.

Credit line, credit line can be arranged with good business banks. The credit lines does cost some money but you don’t need to use it.

 You may want to bring a partner into the business to help with cash flow, this is not necessarily a bad thing.

Operation issues

Supply chain

• Can you get sufficient product
• Can you hire the right people
• Outsourcing
• Fractional support
• Hiring at a new level
• Restructure the org chart
• Have sufficient infrastructure
  

1. CEO (Chief Executive Officer) – goes at the top of the organization chart, if not you, if you are not good with the detail, and the day to day management of your staff, maybe you want to hire CEO.
2. CFO (Chief Finance Officer) – able to provide some operational support and understand the importance of sales
3. CIO (Chief Information Officer)  – Internal or external – more reliance on technology
4. HR – must be competent person – not clerical mindset
5. COO (Chief Operation Officer) – ensure product or service provided at the level you promise
6. CMO (Chief Marketing Officer)  – Bring in the business on an ongoing basis, put processes in place

It could  be that you can’t have your fingers on everything all the time, and so best to see if you can pinpoint a person in your organization that can be a COO, Chief Operating Officer, somebody that can manage the regular day to day activities of the business because you’re going to be starting to work on the business and not in the business. If you have somebody that helps with the operations, then that will help you manage the business a little bit better. In operations, whether it’s manufacturing or service, as you grow the business controlling the operations becomes a little more challenging, so putting procedures in place becomes more critical than ever. You need to make sure that you have policies and procedures. Make sure that your managers also look to those policies and procedures as something important in what you do.

Also your supply chain, you need more of product, you need more of supplies than ever. Are you going to be able to get those supplies and are they going to be the quality that you want from your original supplier? That’s always a question when a business is growing, if your suppliers aren’t able to handle you, sometimes you need to change suppliers. Watch for that in running your business and also a right people, particularly in a service business.

Are you hiring the right people and do you have good processes for hiring the right people? How about to look at outsourcing as you’re growing. Because there maybe some components of your business that you can outsource like HR. Fractional CFO, fractional CEO may be that fast way to start at with ramping up the business.

When you start a business, most entrepreneurs try to do everything themselves. Understandably so you can’t afford to hire people to do all of the components of the business. But as grow, look at what you need to hire and what is the most important component to your business? For every business its a little bit different, but if you look at and make an org chart, look at where your deficiencies  are, where you’re struggling the most, that’s the hole you need to fill first.

CFO, that can be an accounting manager or controller, there are a lot of different terminologies depending upon the size of the business. But have somebody that can help you with understanding your financials and make sure that you’re careful on who you hire and how you manage them. Your CPA can help you with internal controls that are necessary.

A lot of businesses really need a COO, Chief Operation Officer, to get started to make sure that the business operates as it’s supposed to. That you provide whatever product or whatever service your customers expect at the level that you promise. Because the worst thing that you can do is not provide the service or product and lose business because that will start things going in the wrong direction. The CEO is typically the most diverse higher for a lot of smaller businessess. HR is definitely something that can be outsourced for a short period of time. Then something when you get to a certain number of people, 25, 50 you need to bring HR in house.

CIO, Chief Information Officer, you have got to be careful about this position and you need again really good controls because they are working in something that many of us are not familiar with. Are the firewalls sufficient, or your backups sufficient? Do you have protection as a business owner?

CMO, Chief Marketing Officer, a good business owner will need to keep their finger on this sales on a regular basis, because a good salesperson might be able to steal your business. A good business owner should make sure that you keep your thumb on the pulse of revenue.

When you develop your org chart, the CEO, Chief Operating Officer, goes at the top of the org chart. It may not be you if you’re not good with the detail and the day to day management of your staff, maybe you want to hire CEO. Again, not an easy position to fill, so you might look at hiring a consultant before you actually bring them into your business. You can try them out before you hire them. But some business owners literally cannot run their own businessess so they get CEO.

Most people do not effectively manage more than 5 – 7 direct reports. Good business practice is to break it down so that one person including yourself, is not managing more that 5-7 direct reports.

Compliance issues

As you grow, state and federal laws change at different level

• Number of employees
• Amount of revenue
• Tax compliance

Compliance issues change as your business changes, and this is affecting state and federal laws, so you need to be aware of what these changes could be. If your number of employees goes from five employees to 20 employees, you could see some changes in your compliance requirements. Same with that amount of revenue. If your revenue goes from 500,000 to 1.5 milion, you might have different compliance issues, and same with tax. You definitely need to be aware of the payment requirements as far as payroll taxes, income taxes, with other taxes your business may be subjected to. These are things that your attorney or a CPA can help you with, but your compliance issues change as your business grows. 

Source: cousera