Fundamentals of Growth – Part I

One of the areas business owners must have a good foundation in order to grow is their financial administration. Unfortunately, for many, the lack of time and accounting expertise makes it extremely difficult to learn and implement good financial practices. A business owner’s main role and objective is to increase cash flow. This is the lifeblood of their business. This leaves little time to worry about the financial administration. However, having proper financial controls can help:
Increase profitability
Stabilize cash flows
Identify profitable customers

 

Increasing your profitability
Business owners are always making attempts to increase their profitability. Many do so by increasing their sales. However, increasing sales usually comes with an increase in cost. Before selling more services or products, business owners should consider better understanding their profit and cost margins. This means understanding what the cost is to deliver a product or service. Also, understanding the cost to run the current operations, including general and administrative expenses, physical overhead, as well as sales and marketing costs.
Stabilizing your cash flows
Managing the inflow and outflow of cash is one of the most important things a business owner should do, because a business without cash can’t survive for very long. There are policies and procedures that can be implemented in order to encourage faster cash collection from customers. Having systems in place to collect on past due accounts and pay vendor invoices based on negotiated terms can help small business owners better manage their cash.
Identify profitable customers
The Pareto principle states that 80% of your results are produced by 20% of your efforts. This is true in business as well. Most small business have a concentration of customers. This means that 80% of their revenues come from 20% of their customers. Good financial management practices can help you identify those profitable customers and those that may be costing you money.
In summary, having good financial administrative practices can help business owners save time, better manage their business, and increase profitability. Understanding your cost margins, managing your cash flows, and diversifying your customer base are the foundation to growth. These are just a few fundamental best practices in financial administration.
In Fundamentals of Growth – Part II we will cover in more detail how to set a good financial foundation.
Jose Garza, MBA is the Senior Corporate Development Associate with Ephor Group, a Private Equity & Advisory Firm.