Don’t Grow Your Business into a Corner
Most small businesses spend an outsized amount of time thinking about their customers. How can we serve customers better? How can we attract new customers? What other products and services would those customers want to purchase?
Unfortunately, good businesses can find themselves in distress even when they develop great products and serve their customers very well.
We recently worked with a business that had great products, loyal customers with good contracts, and valuable assets–and was facing insolvency. This kind of distress puts valuable supplier and employee relationships at risk, even when the company is functioning well on many key fronts.
How can a great company end up in distress? While the customer is often king, there’s more than one important player in this royal court, because business financing always holds sway over the business owner. It turns out that you can grow a business into financial distress by neglecting the basics of financial management.
Our client had funded a premier long-term facility and technology platform with valuable working capital. When a few short-term operational issues arose, the company was left with a liquidity problem–a problem it could have avoided through better financing and capital management.
How can your business avoid growing itself into a financial problem? Start by asking a few questions that will help you assess your current financial situation:
- How much working capital does my business really need?
- Could the business withstand a short-term operational / customer issue?
- Am I using my working capital to fund non-variable operating expenses?
- Where is working capital getting tied up, and how can I unlock that capital?
Next, ask the questions that will help you to identify new ways to finance your business:
- Can I use long-term or equipment financing to fund operational investments in the business?
- How can I reduce the businesses working capital requirements through better customer and vendor relationship management?
By taking a good look at how you’re funding your business and managing your banking and vendor relationships, then making adjustments to build a healthier financial environment, will enable you to continue delivering premier customer value, without putting your business at risk.
How have you managed your cash flow to ensure financial health? Share your comments and questions with us at firstname.lastname@example.org.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.