One of the most important aspects of managing your cash flow is making smart big picture financial decisions.
All too often a business owner gets so wrapped up in the day-to-day operations of his or her company that they simply don't have the bandwidth to give these key decisions the time or attention they deserve.
Ironically, they often are working dealing with $100 or $1,000 decisions and challenges when these higher order strategic decisions could have 6 or 7-figure impacts on their business.
For example, one of our business coaching clients, Brian, had a marketing specialty items business. One of the first things we did when we began coaching him was to step back and look at his business model.
Prior to our work together he had been basing his growth on building a network of independent reps, each of whom was going to secure accounts ranging in the $1-5,000 per year range.
But a review of his financials showed that Brian made over half his profit from a totally different type of customer (which we termed a "mega client") which his independent reps just weren't qualified to sell to. He made this adjustment, changing his scaling plan of action to call for far fewer reps, but higher quality, selling as employees to this higher profit market.
The result? He tripled his sales in the following 36 months.
Your strategic financial decisions include things like your pricing model, capital investments, staffing and other strategic investment decisions.
Here are several concrete suggestions to make better strategic financial decisions:
1. Get accurate and timely financial data before making long-term financial decisions.
Smart business owners let accurate data inform their mission-critical moves. It still shocks me to see the number of small and medium size companies who make big decisions with inaccurate or grossly incomplete financial information.
2. Review your strategic pricing decisions.
Most businesses set their prices when the business is new and desperately needs business, and as a result, set pricing levels low. Over time, the business may make nominal increases to pricing every few years, but rarely does the owner ever sit down and fundamentally rethink his pricing model.
Do you price in relationship to your costs and your competitors? The most successful companies take both of these factors into consideration, but they also price in relationship to the cost of the status quo for their customers.
How much is the problem that your product or service solves already costing them? What is the real value of your product of service? What is the "frame of reference" you could give your customers that would help them immediately see your product or service as both the logically sound and emotionally satisfying solution?
3. Consider changing how you charge.
Is there a way you can move from a one-time charge to an ongoing revenue stream?
Perhaps you do have a one-time charge for the initial purchase, but is there a way you can provide ongoing value to service your client on an ongoing basis?
The smartest business models allow companies to annuitize their business relationships.
4. Find the optimal staffing level and manage your hiring intelligently.
Look for a simple heuristic that helps you know when you need to hire more production and operational staff (e.g., sales per employee, projects per operations staff, etc.) and when you are too heavy.
What are the indicators that alert you to the need to staff up or staff down? What investments could you make in technology, systems, and training that would allow you to produce more with fewer people?
Note that generally "A" players produce multiples more value than B or C players, yet cost only a percentage more.
Constantly be on the lookout for ways you can upgrade your team over time so that you can produce more with less.
5. Get clear, fresh perspective before you make a major capital investment.
All too often, business owners find a succession of small commitment steps lead them over the edge of the cliff when making the big infrastructure and capital decisions.
They let sunk costs and vested interests that they are afraid of losing push them to chase bad money with good.
After you have gathered all the relevant facts, step back with your leadership team and ask the question fresh: "Knowing all we know today and imagining that we had no sunk costs at this point at all, what is the best decision for the business over the short, medium, and long term?"
6. Know the difference between strategic expenses and nonstrategic expenses.
Strategic expenses are those things that directly help you sell more or produce better. They include marketing campaigns that work, salespeople who sell, technology upgrades that reap real returns and ongoing advantages of significant value, and intellectual property barriers that give you a sustainable advantage for which the market will pay.
Nonstrategic expenses essentially include everything else.
Outspend your competition for strategic expenses--in good times and bad. Relentlessly cut nonstrategic expenses. And repeat this over and over.