How would this impact your business financially?21st November 2018
Over the past couple of weeks, I’ve been arguing that you need to be more aware of external events that can have a big impact on your business, so you can plan accordingly.
But identifying these events doesn’t solve everything.
You need to analyse correctly how they might affect you. Here’s a cautionary tale.
Like many industries, manufacturing is changing rapidly as companies move towards on-demand manufacturing and 3D printing.
A business we know in this industry could clearly see that this was going to affect their business model – and tried to be proactive. It decided to change certain things about the way it operated, because it understood that long-term, it was the only way to stay profitable.
What they hadn’t realised was that because of the changes in the industry, its customers just weren’t paying as quickly as they used to.
Its cash flow was affected, and they experienced a major cash crunch which almost killed the company. They were lucky to survive.
The moral of the story?
When your business is affected by external events that are beyond your control, it’s natural that you think about how to adjust your business model.
Should you focus on new markets, change your product, switch suppliers? What do you need to do, to take advantage of new opportunities – and duck threats?
But you also have to think about what these changes might mean to your company financially.
This goes way beyond how your profit might go up or down - though that’s part of it….
You need to ask yourself, “How am I going to support my company financially through these changes?”
So, for example, if you know that your turnover is going to take a hit, how much capital do you need to hold in reserve?
Do you need to change your payment terms to keep your cash flow reliable and steady?
Might you need to increase or decrease your inventory, or stock some new and entirely different products?
Will you have more money tied up in receivables, and less available to work with?
When the landscape changes around you, there will inevitably be implications for the way you manage your business’s money. And if you don’t think these issues through, you will end up in financial trouble.
This principle doesn’t just apply to surviving threats, by the way. It’s equally important for your ability to take full advantage of opportunities as they arise.
After all, how can you be confident that your company is ready to grasp an opportunity, if you’re not sure you’ll have the cash to fund a new project?
Financial planning is key to your company’s survival and success, and is taken for granted by corporates.
Yet smaller businesses often cover their bookkeeping and accounting, and don’t do any real financial planning at all.
If you want to start operating at a higher level….
Giving yourself the kind of financial management that can get you to £5 million, £10 million and beyond….
With the right planning in place, you can not only weather any storm… and take advantage of every opportunity…. But proactively build the kind of company you dream of.