Updated: Mar 23
There is nothing worse than having a great opportunity for success pass you by because you did not have the money.
Actually, starting to taste success and then running out of money is worse. You were almost there and could taste it. I’ve been there and have the scars to prove it. Assuming you want to grow your company organically and not take on debt or investment in exchange for equity, let’s discuss how to get your company and financials in order. Get Everyone Bought In! Your greatest source of cash is your existing employees. I do not mean their salaries but their ideas and help. I strongly believe in investing time with employees to ensure they understand the financial aspects of the business. Do they know where they impact the income statement? Are they Revenue or Expense? Once they know, they are more likely to make decisions that support the growth goals of the company.
During monthly employee or All-Staff meetings, I always take time to explain some financial aspect of the company. I then will play a game with the employee(s) and ask individuals “Are you Revenue or Expense?”. Once I get their response, I congratulate if correct and educate if not. I will also ask “What do we do with Revenue – maximize”, “What do we do with Expenses – manage”. Always say “manage”, never say “cut”. I also incorporate EBITDA into the conversation with employees. This is a financial calculation that they can impact. Be transparent and show the employees where the company stands on a monthly basis, budget vs. actual. Many companies associate annual bonuses with EBITDA. Once they see how it impacts them, they are much more likely to engage. If you make it fun, they will too. One employee came to a meeting with a baseball cap that said “EBITDA” on the front. Everyone got a kick out of it.
The reason this is so important is that employees can find amazing ways to streamline/lower expenses and generate revenue if they feel inclined and empowered to do so. Asking them to cut expenses is a demotivator. Asking them to help better “manage” expenses so we can re-invest to grow the company and create more opportunities is a strong motivator.
Create a Financial Growth Plan and Work It! To support a growing company financially, you need cash and a plan. The amount of cash is dependent on the plan. Now that you have followed my other steps up to this point and have employees on-board, you should have a good team to help with what you need and when. If not, go back and flesh it out further. Do not accept “pie in the sky” ideas as a plan. Have the team create a realistic 12-month and 24-month plan, at minimum, outlining what you need, when you need it, and why. Make sure the plan identifies incremental expenditures and takes into consideration existing operations. Too many companies leverage existing staff on sexy projects and sacrifice existing customer service, products, etc. You are going to need existing revenue to fund the new growth so do not compromise on quality. Do not underestimate this step as you can stretch employees too far and lose valuable customers. Once you have the financial plan for growth, add 25% - 50%. It bears repeating, everything ends up costing more than originally expected. That’s why project managers build in contingencies and many CFO’s are very conservative. Plan for it and you won’t be surprised.
How are you going to fund it?
Let’s assume you have a reasonably well-run company at this point. If you are upside down financially, you need to focus on becoming profitable rather than strong growth.
The first thing to do is to review all expenditures, from most to least, in the following context (with examples):
Must Have – If you must maintain, can the expense be reduced without too much compromise?
Vendor services - look for lower prices elsewhere
Water delivery through Costco
Supplies through Amazon
Internet services willing to compete
Banking services – many banks will compete for your account. Look for things like lower credit card/transaction fees, higher interest rates on cash funds, etc.
Leverage technology to lower costs
SaaS based Voice over IP in lieu of expensive traditional landline service
Upgrade laptops versus buying new ones (short term gain but a nice SSD card will go a long way)
Contracts – review and evaluate existing contracts
Existing customers – some customers cost much more than they are worth. If they are a major resource drain compared to revenue, increase rate to justify or do not renew contract.
Vendor/Partner Contracts – evaluate each to ensure good business for you. If not, renegotiate or look for another partner.
Projects – do you really need that project? Is it on-track to deliver the ROI you expect? If not, can you cancel and free up resources? Capital vs. Expense/Buy vs. Lease – evaluate each expenditure for what makes more sense for you. Sometimes spreading the cost over a longer period of time will help free up much needed cash versus a large capital outlay.
Accounts Receivable – try to reduce your “days outstanding” as much as possible. Provide reasonable payment terms that support your business model and make sure you are on top of any accounts that stretch beyond their contractual timeframe. If consistently late, have a conversation with the client to understand why. Staying on top can save a lot if a client is having problems themselves. Once you go through this exercise, you should have a good idea how much you can generate organically for growth. Start tracking it and give the team positive feedback and encouragement once these efforts start to pay off.
Managing the Growth Financially Key Performance Indicators - It is critical that you have relevant and well-thought-out Key Performance Indicators (KPI’s). Incorporate them into a monthly financial dashboard for the leadership team. If you are not sure what they should be, bring in a consultant for a day or two. At a minimum, incorporate KPI’s to monitor cash, AR, Budget vs. Actual for Revenue and Expenses, Profit (or EBITDA), and Sales Bookings. Return on Investment - Evaluate all purchases based upon ROI, especially the larger ones. Do you know what value you are getting in exchange for the investment? Do you know when you will recognize it? This should be analyzed beforehand. There are always good reasons for investments but when you require people to think in the context of identifying them financially, it can help reduce the emotional spend.
Fiscally Responsible Growth You want to manage growth in a fiscally responsible way. Do not take on business that you cannot handle. Do not overextend yourself financially and strain the organization, and employees, beyond limits. Establish Operating Reserve and Line of Credit – There will be periods of investment in resources required before the cash comes in. Examples are large client projects, inventory purchases, and so on. This can also happen when using subscription-based pricing (spread payments over term of contract but have large initial outlay to get the client up and going). I recommend taking profit and establishing an Operating Reserve fund. You should establish rules for when and how you tap into the fund. Same goes for a line of credit from the bank. Make sure and establish this before you need it. Create strict rules for when and how this is used. Invest in a Strong Financial Team One of your best investments in resources is a strong finance leader and team members. Make sure they are well recommended and display the highest integrity. With all the changing tax rules, methods of revenue recognition, banking relationships, and more, things can get very complex. The right team can save you an enormous amount of money. Think of them as much more than bean counters. They should be assets and profit centers. A CFO’s role should be to support the company’s goals financially and to protect it. Do not skimp. Hire the best you can afford. Key Takeaways ● Invest in the culture and education of your employees ● Develop a plan for growth and understand how to fund it ● Establish KPI’s to monitor the financial health ● Grow responsibly ● Get the best finance team you can afford