Telling the truth about SME life today

Don’t be a cash casualty

Before we go further, you absolutely must know how much cash is in your business and have a cash-flow forecast going out a minimum six to nine months. As Ross Perot, Texan founder of EDS (a billion-dollar business) and one-time US presidential candidate, famously said in his amusing book My Life: “No-one ever went bust with money in the bank.”

Having said that, cash coming into and out of the business is a direct result of decisions made by the business in prior periods. So, I’d expect the business pathologist to first examine the key building blocks of the business model, and assess to what extent each of those was responsible for the demise.

The examination would start with the sales model (which is the air in our analogy!). Has the business really come up with a unique proposition at its chosen price point which is communicated effectively” In my experience, entrepreneurs get carried away with enthusiasm and passion and gloss over proper competitor analysis and the crucial role played by marketing.

If asphyxiation is ruled out, the next area to examine would be the guts of any business – the value added or gross-profit model. Given the price point, has the company put too little or too much value in the product (ie: is the gross margin sufficient?). Remember: gross profits (sales less direct costs) cover the overheads – the next area of examination.

Overheads, the costs of running a business, can be notoriously difficult to manage, especially in a fast-growing business. Are you going to be a stripped-out Dell-style internet offering, or an Apple-store full service Whichever option you choose, you will need to tread carefully as you juggle overheads and the build-up of your gross profit, which is needed to get to break even.

And finally, the examination would look at dehydration, or cash in this case, which is the absolute necessity for life! Looking first at the funding model, has the business opted for too much debt in favour of a more conservative structure with more equity” The more a business relies on borrowing, the more it is exposed in a downturn when the lemmings run for cover.

Then, there is the working capital aspect of funding, the area that tends to cause the most confusion for entrepreneurs – the realisation that profit doesn’t equal cash. There are timing differences between when customers pay you, and when you have to pay your suppliers, and of course how much stock you need. Collectively, these form your working-capital model. Your job is to come up with a model that minimises the amount of working capital you need, as this in turn will reduce the amount of funding required. As business picks up, many companies will find that working capital requires more, rather than less, management time.

Remember: a regular medical screening on your business model is the best way to keep it out of the morgue.

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