A major capital investment may seem like a no-brainer, but it will change your organization in ways you need to consider before signing the purchase order.
All of the added costs and inefficiencies had reduced my forecast profits to single digits. Mistakes cut them even further. As our reputation spread, so did our growth, and the pressures on cash flow continued. It was a very expensive lesson and ultimately took almost five years to recover.
Let’s back up to the concept about a business being in balance and the related rates between production, sales/marketing, and FinMin. Arguably, the most important consideration is the one that results from your success – the impact on cash flow. Without adequate cash flow, you are done. You can’t grow, and ultimately, you may be out of business.
The decisions you make are tied to how much available cash you have. Young operations today have the luxury of selling online and collecting 100 percent of the order before it is even produced. That definitely lessens the pressure, but it does not solve the problem. More money only accelerates the problems you have. It’s like rocket fuel: Properly channeled, it will accelerate your growth and profitability. Handle it improperly and you’ll blow yourself up.
Lesson #1: Understand Your Cash Flow Statement
The cash flow statement is the third, and least common, of the major accounting statements. The others are the income statement (also referred to as the profit and loss statement), which details income, expenses, and profits; and the balance sheet, which tells you how your assets and liabilities are divided, as well as how much equity the business has.
The cash flow statement is sometimes called a sources and uses statement. (You may also hear it called a funds statement or a statement of changes in financial position.) Sources are increases in profit, cash from accounts receivable, collections deposits, prepayments, AR advances (receivable financing), and new working capital loans. Uses are principle reduction on loans, accounts payable payments, purchases (inventory, supplies, and equipment), operational expenses, and increases in AR.
Whatever the name, don’t be scared of this document. It simply tells you where your cash is coming from and how you are using it. The statement is the key to your success and survival. Cash is the life blood of the business and if it bleeds out, the business will die. It’s as simple as that.
Lesson #2: Know Your Financial Gap
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