Revenue, Cost & Capital in Your Business

Positive cash flow is desirable for everyone in business. It is achieved universally through generating substantial revenues, controlling costs, and structuring capital wisely. Some tips and techniques are shared below:

Generating Revenue

Successful businesses excel at making sales. You know the saying, “the rich get richer?” Well,the corollary is that those who have revenues get more revenues as a factor of customers wanting to be associated with a successful brand. One thought you should consider is to go after markets that are less susceptible to the uncertainties of interest rates and the economy. If you were a homebuilder (you’d be an industry famous for tracking closely with the economy), you would be wise, for example to pursue both upper-income retirees and “move-up” families. These two demographic groups tend to be less affected by economic turns  and have demonstrated a time-tested pattern of purchasing homes in most any economy. Knowing the segments of your market well enough to follow suit and service the buyers with money to spend will position your company to operate for maximum profitability.

Successful executive teams know that targeting buyers with focused offerings is key to penetrating your ideal market. Regardless your market dynamics, the goal is to increase volume. With higher volumes come higher velocity cash flows. This increased velocity creates the favorable setting for financing terms that suit your financial model. Yet, it is clear that profit margins must be maintained else increased velocity exacerbate losses.

Controlling Costs

The focus of controlling costs is to optimize expenses as investments–not eliminate them! Cost management evaluates not only the amplitude of the individual expense, but its impact on organizational performance. While the general principle is to control the growth of costs, there are strategic advantages to be gained from choosing to incur the right expense for the right reason at the right time. Another major shortcoming in the financial management of many companies is the effort to wring cost out of processes and retain all of the benefit of the exercise in the hands of a greedy few. Passing along savings to customers is a great way to build a customer base advocacy. Not all of the profits, mind you, …but enough to become even more competitive.

If your organization does not have a process to monitor and eliminate waste, it needs one! Sharing items like technology, administrative labor, equipment, and offices/desks is “low hanging fruit” in this area. Most resources do not need to be dedicated to one person or department because they cannot be utilized enough to justify the additional expense. Look at ways to speed up the delivery of your product/service to market–scheduling and workflow management process improvements drive profits to the bottom line quickly, as well as freeing up needed cash flow.

Monitor invoices–make sure that payments are for things ordered  and received by specification and terms. Evaluate reporting systems. Dashboard feedback on expenses, margins, and cash activity help executives manage rather than being managed.

Structuring Capital

Get a god fix on the financial capital structure of your business and how it compares to competitors. Doing so will drive planning relative to debt capacity, valuation, growth, and many other categories. Taking the approach that debt is always a short-term tool and is to be repaid as soon as possible will increase a company’s capacity to take on debt when absolutely necessary. Think through cash reserves and how they speak loudly to others as to your management acumen and company viability.

When preparing pro-forma projections of anticipated cash flows, make sure that worst case scenarios are considered. Money on deposit is a precious commodity and those who have it are in a position of strength. Having products or services in development that can be brought to market quickly is an asset for those well-capitalized, a liability for those who are not.  Your unique debt to equity ratio should be stronger than your industry–and should reflect the commitment of the executive team to run the business according to thoughtful metrics and attention to details.

How Successful Businesses Create Positive Cash Flow

Successful companies generate positive cash flow through efficient operations and effective marketing. Generating revenue is not like raising funds for a charity–people will not offer you money simply because they agree with what you do. Businesses succeed when they are able to convince buyers that their products/services are superior to and of greater value than the offerings of other providers. Controlling costs is critical; make provisions for unavoidable cost variances and eliminate waste in areas where  costs–or at least overruns–can be avoided. Planning for adequate capital structure is also essential; debt-laden companies cannot achieve the same level of success as companies with enough equity. Being able to bring in sufficient revenues and preventing large amounts from being paid out will lead to positive cash flow.

Effective companies generate positive cash flow consistently. The business is streamlined continually to  narrowly defined core acutely focused on making sales, controlling costs, and structuring capital. Creating and maintaining positive cash flows is a continual goal of any business, and an ongoing reality in profitable ones. The exercise of staying profitable and successful requires more discipline than many executive teams are willing to enforce in their operations. For example, moving inventory in a timely manner is puzzle to many businesses that make products.; however, those who develop a formula for success in this area are well on their way to positive cash flows. Controlling costs, though, is not synonymous with eliminating costs. Eliminating costs in an arbitrary fashion can kill momentum and limit financial flexibility. Capital is a useful tool if its effects are controlled, and businesses able to avoid large debt loads are more consistently profitable.

While positive cash flow may seem like a lofty ideal to some teams, the investment and financial communities consider cash flow a distinguishing barometer of business stability. Companies with favorable cash flows can secure more favorable financing terms and receive more concessions from vendors and subcontract organizations. For example, businesses with positive cash flows can negotiate higher discounts when they are able to pay invoices early. Additionally, they can prepay materials and buy in volume for even steeper discounts. An enterprise that consistently demonstrates that it can cover more than its cost of doing business (as evidenced by positive net income) will rack up profits and retained earnings year after year and attract more customers, since buyers often feel that profitable companies are more likely to survive and meet their needs for the long run. Therefore, positive cash flow should be the goal of every employee in the business. 

One of the most important things to remember when incurring financial obligations that affect your cash flow is to stay within acceptable industry ratios. Most industries have trade organizations that publish benchmarking data to help representative companies do a better job of analyzing how they compare with norms. The analysis should not become an end unto itself, however. Use the data to have productive conversations with your CPA, banker, and investors. Unless you want a very short day in the sun, avoid reliance on debt. To remain financially competitive, choose capital financing sources wisely and do not burden your operations and marketing teams with a weight too heavy to bear.


How Do Successful Businesses Manage Their Finances?

Once the marketing plan has been developed and the product (service) mix defined, successful executive teams develop a financial plan to determine whether their offerings are economically feasible. Such financial considerations as sources of funding, cash availability, and marketing investment need to be evaluated.

Again, no department or manager can operate in a vacuum during this planning process; it is highly likely that staff in the marketing, finance and operations areas will collaborate on the development of plans for their respective areas, as well as on all aspects of an overall business plan. When a new project, product, or service is contemplated, the finance and accounting staff, in conjunction with the business owner(s), head of marketing, and head of operations should evaluate the company’s ability to:

  • get the initiative off the ground,
  • fund it during development and launch, and
  • continue to support it through sales process and beyond.

Successful businesses are always careful to perform all necessary analysis of these three aspects of innovation. They never assume the financial capability to launch a new idea guarantees success; rather, it is understood that the ability to begin a project is of no value if momentum cannot be sustained through the point of post-sale customer service and satisfaction. The cash required to pay overhead and ongoing obligations when no revenues are coming in from the new initiative can put a company into bankruptcy if not anticipated beforehand.

Securing capital sources is another step in sound business financial planning. The timing and amounts of cash infusions are critical considerations within the overall plan. Sometimes, the lure of a large project or contract can cloud judgment. Without adequate preparation for the cash impact of “ramping up” for new scopes of work, sales volume can become a curse. In fact, some businesses become specific in their growth goals so as to not outstrip precious capital reserve allocation guidelines. (This is not to say, however, that financial instruments such as contract financing are not a way to “have one’s cake and eat it too.”)

Making sure that the business has the wherewithal to “scale” to fit customer demand is important. There will invariably be times when the requirements to pay down payables balances will be instituted by lenders or investors. Likewise, receivables balances cannot become too large too quickly without causing alarm as to the liquidity of the business to meet obligations. Creating a working capital account that is adequately funded to weather fluctuations in business volume–in either direction–is wisdom. How one goes about pre-funding it is “science!”

Businesses that plan for their monetary requirements at every stage of innovation will consistently make more money than those that “fly by the seat of their pants.”  Developing financial plans that support marketing and operational plans is essential for profit maximization. The results of this planning are recommendations to either scrap, revise, or move forward speedily with exciting projects that can lead to increased brand awareness, market share, revenues, and profitability. However, one would do well to remember that no going concern has ever gone broke because its executive team did not start a new project.