Entrepreneurs are a funny bunch. They always seem to enjoy operating "on the edge." Their motto seems to be, "in this day and age, if you are not living on the edge you are taking too much space." Point taken, however, this doesn't mean that we can forever adopt the "seat of the pants" management approach and ignore the financial expert's continual advice to plan, plan, plan and instead wait, wait, wait, until it's too late!
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n neglecting the practice of preventive maintenance, some entrepreneurs wait for the symptoms of problems to appear and then respond. They would usually wait until they were very sick to go to doctor operating on the theory that "if it ain’t broke don't fix it!" In the business world, of course, we romantically call this approach the entrepreneurial spirit, the go-for-broke, gut-feel. Now, don't get me wrong; I strongly believe in these attitudes. But they need to be put within a structure; a framework which capitalizes on strengths and shores up the weaknesses of the business by treating the root causes not the symptoms. One of the major causes of business failures is the lack of proper financial planning most of the time results in a severe cash flow problem. However, attempting to fix the cash flow problem without analyzing and treating the underlying causes is a worthless exercise and a useless attempt to treat the symptoms and ignore the causes. So, what are the underlying causes of cash flow deficiencies? Aside from external factors that are outside the business control like political, economical, environmental, social, technological and competitors, the main causes of cash flow problems are internal factors. While businesses may not be able to control external factors, they can reduce the impact of these external factors with proper planning and preparation. Aside from the Global economic crisis and the tightening of the lending policies, the most significant external factors that had huge impact on businesses in Australia are the recent floods, hurricanes and fires that have devastated the land and caused many businesses to falter with huge number of enterprises falling like autumn leaves. Nevertheless, internal factors are totally within the control of the business and are the underlying cause to lack of cash flow predicament for entrepreneurs. Some of these causes include but not limited to the following:
1. Meager profitability. Mostly caused by lack of strategic planning, lack of clarity and focus, and lack of consistent and meaningful marketing strategies. 2. Over capitalization. Entrepreneurs are risk takers and thus may take investing or buying decisions without proper research. Buying new business premises or purchasing assets that do not produce reasonable returns can put the entire enterprise in a tight cash flow squeeze. 3. Lack of financial planning. Being not prepared for sudden business emergencies and unforeseen downturns in sales. 4. High level of borrowing. Using other people's money and over borrowing causing the business to default on payments of loans etc. 5. Unplanned and uncontrolled growth. One of the catalysts of business failures, unplanned growth can stretch the business resources and cause severe trauma to the whole operation. For example, if the business owner does not understand the relationship between average cost per unit or sale to the output then they might overtrade and cause a seizure to the business operation. The reverse can happen too, where the business is under trading. 6. Poor control of debtors, creditors and stock levels. They are called the silent killers of cash flow, these three factors are the epicenter of the business operation and any malfunction in one of them can cause severe ulcers in the whole body of the business. 7. Not setting aside the Tax Man's money. They say two things are definite in life" death and taxes" GST [Goods and Services Tax. U.S. sales tax], payroll tax, etc, including the employees' super payments, work cover are all payments that must be paid regardless. Again, some business owners take the liberty of withdrawing more cash out of the business than the business is generating, consequently taking the sustenance out of the operation. 8. The entrepreneur's financial illiteracy. If the entrepreneur lacks financial literacy and doesn't make business decisions based on sound and regular financial reports and analysis, then the whole operation will ineffective and will suffer a sudden death due to cash flow measures. 9. No internal controls. Lack of business systems, procedures, policies and check lists is the recipe for disaster, in particular when it comes to following up with overdue accounts, business expenses, KPI [key performance indicator ] reports, business goals etc, leading to a great misalignment between the business objectives and its mission. I always say "doctors bury their mistakes, entrepreneurs assert their entrepreneurial spirit." Having said that, [consider that] the early diagnosis by a good doctor can save human lives. Similarly, early diagnosis of cash flow causes can save your business and will also save you the trip to the hospital for ulcer treatment!
Attempting to fix the cash flow problem without analyzing and treating the underlying causes is a worthless exercise and a useless attempt to treat the symptoms and ignore the causes. No longer relying on the profit and loss statement is enough for entrepreneurs to navigate their businesses through the current traitorous business environment. Ensuring a healthy business with a lifeline of sound source of cash flow by timely strategic financial planning, reporting and decision making is paramount to the survival of today's entrepreneurs and their enterprises. This will definitely lead to early diagnosis of any cash flow problems and will result in treating the causes not the symptoms. Michael Yacoub is the CEO and Founder of Advantex International. Advantex International is located on the Gold Coast, Qld Australia and provides business coaching, strategic planning and business development services. If you are looking for Gold Coast business mentor, please visit www. advantexinternational.com.au. Reprinted with permission from: www.articlesbase.com
latinbiz
first quarter 2011
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