Thursday, June 27, 2013

An Ounce of Prevention

Too often companies do not pay enough attention to cost control until they run out of cash.  By then it’s too late to take the action necessary to avoid the problem.  It is far too late to try and manage cash when you don’t have any.  And anyone who has ever tried to raise capital knows that the absolute worst time to get cash from banks or other funding sources is when you desperately need it.  It takes disciplined planning to avoid the inevitable outcome of an unforeseen cash crisis.  Certainly, some companies have survived in times of significant cash difficulties without planning.  However, the most likely result of a severe cash shortfall without some advanced notice and no access to additional capital is very ugly.  Do you really want to play the odds?

How do you know in advance when there is going to be trouble?  The only sure way of avoiding or at least managing through a severe cash flow problem is to estimate the company’s future performance – profit – and the cash flow generated and required by that performance.  By knowing when a cash crunch will develop you can take the necessary action to manage through it BEFORE it has materialized.  It may mean you will need to reduce expenses (payroll, travel, etc.), cut back or delay capital expenditures (equipment, etc.) or borrow the necessary funds to get through the cash shortage.  Although it can be a painful process, it is possible to “weather the storm” when you are prepared.  Being prepared could be the difference between life and death for the business.

Your most important tool in this effort is a budget.  A budget can be as simple as writing an estimate of revenue with the expenses you expect to incur while generating and supporting that revenue on a napkin.  As long as it gives you an idea about what the target is and what it will take to get there, you at least have something to compare your actual performance to each month.  When you compare the actual performance to the “budget” you can then determine what action, if any, must be taken to get back on track with the plan.  Over time, as you continue to make the comparisons, you will begin to refine your estimates to incorporate a much more significant level of detail.  After only a little time you will have developed a very sophisticated and useful tool.  The knowledge you gain and the “feel” for the business you will develop will significantly improve your effectiveness thereby increasing the value of the organization.  You only need to start at the beginning and maintain the determination to continue the process.  If that is done, you cannot help but improve the performance of your company.

Thursday, June 6, 2013

Good Heuristics Make Good Intuition

The Merriam-Webster dictionary defines heuristic as “involving or serving as an aid to learning, discovery, or problem-solving by experimental and especially trial-and-error methods."  The danger is that unless a well-grounded system is in place to provide sufficient objective information, over time a heuristic approach to decision-making in your business can very easily give rise to a certain mind-set, thereby establishing a pattern of behavior that leads to consistently undesirable results.  Without the proper frame of reference from which to form any decision, a successful outcome cannot be expected.

However, when the frame of reference is grounded with a solid profit mentality, the odds of producing positive and desirable results improve significantly.  Understanding the relationships that exist between the various types of information presented in the P&L is invaluable for understanding the true nature of the business.  Unless you understand the global impact of the decisions you make (and every decision has a very definite financial affect), you can never fully understand the business and you are in danger of fatal mistakes at almost every turn. 

Developing a better “feel” for your company requires an improved, properly grounded, intuition regarding the underlying dynamics that affect the various parts of the business.  When you understand the relationships that exist you will better understand how your decisions ripple through the organization.  Although financial issues are specifically being addressed here, the affect of each decision will be felt on every level and in every area; financially, operationally and organizationally.  It is a fact that the environment in poorly managed cash strapped companies is entirely different than that of well run cash rich organizations.

What do you do to make sure your business intuition is grounded in reality?