07.17.17

Going Broke? How Is That Even Possible?

Todd Schrock, Advisor with The CEO Advantage

How to Overcome the Unique Challenges of Emerging Businesses (20-100 Employees) Article #3 in the series.

You never imagined. The year your business’s revenues finally broke through. In a big way.

Years of hard work and sacrifice building to this moment of—a drained bank account, a dwindled credit line and diminished owner assets.

“If I can just scrape through, it will be my most profitable year.” But where is all the cash? This was not the reward you expected. (Why had no one warned you about “rich on paper”?) More importantly, what happened and how can you fix?

 Don’t confuse revenue growth with success.

“SURVIVE AND ADVANCE”

Don’t confuse revenue growth with success. Until you have created a cash-flowable business that can sustain profits as it grows through consistent, internally-generated cash, you have not yet succeeded.

With 20-100 employees you are in that “emerging phase” where you have just become a low-midsize company (or will with a few years of growth). The key is to scale up profitably, one step at a time, with your eyes glued on financial realities of this stage. This happens by sequencing growth and expansion carefully, through an intentional focus on the cash perspective.

Because it is necessary to quickly learn new financial lessons, you could call this the “Survive and Advance” stage. As the March Madness cliché clearly implies: lose once, and your post-season run has ended. Survival is not assured, even for the top teams. There will be no eventual success without survival. Since you can’t count on luck (or the good graces of wealthy family members), it is critical to understand essential truths about cash and cash flow and embed them firmly into your company’s rhythms.

Why is a “survive and advance” theme often so critical at this point where CEOs have not yet fully built the company of their dreams?

First, there are so many urgent distractions inside the company and in the market.

Second, most operations do not produce super-high margins on low overhead.

Additionally, many companies at this stage do not yet have a well-capitalized balance sheet to ensure that growth plans and business needs do not threaten to outstrip the owners’ personal assets.

Therefore, just as the pace picks up and the spotlight heats up, your margin for error shrinks. The excitement and apparent success of growth often deceives many in the company to believe that “we’ve already made it.” Rather, it is the stage to continue to keep your eye on the true business needs first, versus indulging in the “fun stuff” and the “future stuff” that you have been waiting so long to do.

A promising future can vaporize by not understanding the financial realities of this stage. Don’t kill the golden goose just as you cash in the first few eggs. Deeply embed a cash-flow mentality into your planning and your people’s daily habits. Then support both with the right processes.

Will you be in the minority of entrepreneurs who learn these lessons before your future options become limited (or worse)?To “survive (the cash crises) and advance,” accomplish these priorities:

FIRST, BUILD THE RIGHT FINANCIAL TEAM AND SYSTEM

1.      THE RIGHT FINANCIAL TEAM

There are a lot of things the right financial team does not need to be. It does not need to be a certain number of people; those people do not necessarily need to be employees or hold certain degrees. But you do need to make sure you get the financial acumen necessary for this stage of growth (not just for larger or smaller companies), as well as for the complexity of your industry.

The only likely common requirement for emerging businesses is that the head financial person must be able to at least handle Controller-level responsibilities for your industry and size. As you grow, this person hopefully can grow in certain necessary CFO-level skills, though a variety of fractional CFO services can bridge the gap until you can afford the appropriate CFO. You might not need a completely CFO-capable employee until you are bigger than 100 employees.

Also, if the CEO comes from a financial background, then there are a few other requirements to ensure that the CEO’s personal strength does not, in fact, become an organizational weakness.

2.      THE RIGHT FINANCIAL SYSTEM

At its root, the right financial system needs to be undergirded by a solid accounting system that is able to handle the basic accounting details of your business and industry. But it must accomplish more.

The right financial team will be able to build for you the components of a system that:

  • can help you clearly see your current financial situation,
  • regularly revise a forward-looking financial view, and
  • provide an easy platform for each employee to positively influence future resultsby what they do today.

And, the right financial system needs to enable the CEO and Leadership Team to groweach employee’s understanding of how they personally can contribute toward greater profit and increased cash flow. There is no better way to engage your employee’s full talents for your benefit and theirs.

SECOND, LEARN WELL THE CASH TRUTHS MOST NEEDED FOR THE EMERGING STAGE

  1. Profit does not equal cash-flow.
  2. Credit is not capital.
  3. Growth sucks cash.
  4. Cash provides an entrepreneurial cushion.

These are critical to understand, and I will explore them further in the next article.

CEO RHYTHMS FORUM

If your company is in Northeast Indiana, consider expanding your circle of informal advisors by joining your CEO/Owner peers and me in a CEO Rhythms Forum, a new opportunity for those with the unique challenge of owning or running businesses of 20-100 employees.

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