Manage Your Cash to Avoid Black Holes, Sinkholes & No Holds Barred Growth!
Business is tough. The high failure rate—reportedly 85% during the first five years—is evidence of that. But an even bigger challenge looms on the horizon for many startup or small businesses that make it past the $1M in annual revenues mark.
Namely, most companies in the US—96% of which are small businesses under $1 million in annual revenues—show anemic profitability. I know, because more than 25 years ago I studied the RMA Annual Statement Studies—the authority on aggregated results of thousands of companies in every industry, along with their financial results. Would you believe that most companies earn a pre-tax profit of between +/- 2%? That is, two thirds of all companies make little or no profit.
If you can get to the $1 million mark—something I have helped scores of businesses do in over twenty-five years of consulting business owners—you are in the top four to five percent of all US businesses.
The next hurdle is getting through the black hole. According to Greg Crabtree, a CPA and author of Simple Numbers, Straight Talk, Big Profits!, as a business grows from $1 million to $5 million in revenue, it will pass through the black hole. “This is the time in your business growth when you’re forced to add staffing and infrastructure before you can really afford to pay for it. Even if you try to add it as late as possible and maybe even pay for only part-time help, at the end of the day you’re going to drive profitability down and risk destroying your business.” Crabtree continues, “To survive, the business owner must have adequate resources to hire additional staff to take responsibility for key functional areas (i.e., sales, marketing, operations, IT/technology, finance, etc.) And, to get through the black hole, you will need a capital safety net.”
If you can get through this black hole, then your next focus becomes profitability. Breaking even is not good enough at this point. One of the common mistakes I have seen small businesses owners make is failing to take a “reasonable and customary” salary. I have worked with too many businesses that either bury personal expenses or take minimal or no salaries. As a result, they don’t really know what their ‘true’ bottom-line, pretax profit is at the end of a financial reporting period. Thus, in the end, they can’t really tell whether they are making a small profit, a healthy profit or no profit at all.
This lack of sophistication is generally most true of those businesses under $1 million in revenue, but I’ve also seen it true in much larger companies. Another problem I observe all too often is owners not knowing their “true” gross profit. Since it is hard to manage to get a bottom line profit, the “middle line” (or gross profit) is a good dividing line between the top line and bottom line.
However, most owners don’t measure it accurately, change the way it’s measured too often, and/or don’t know how they compare to others in their industry—or even to themselves—over time. This is a huge problem I call the sink hole, as is the fact that two thirds of all companies make an anemic level of profitability. If you want to avoid a sink hole, then, you must know what your breakeven point is and face reality:
● Five percent or less of pre-tax profit means your business is on life support. ● Ten percent of pre-tax profit means you have a good business. ● Fifteen percent or more of pre-tax profit means you have a great business.
Profits are paramount in a business. So is cash or liquidity. Further, while cash is even more important, the simple truth is that poor management of either is certain to sink most companies.
Let’s take the no-holds-barred-growth company next. This is the company that is growing at a hyper-fast growth rate of, for example, more than 40% annually. This company, which has a no-holds-barred attitude about growth, is all-too-often outgrowing its founder’s leadership abilities along with its people’s abilities. If the systems don’t collapse first, its leadership and management abilities may languish, or its cash may dry up. These companies can literally grow bankrupt by its no-holds-barred-growth approach. Generally, rising sales hides many errors in a business. But when those sales are rising at an exponential rate, the risk of failure is that much greater.
There are many great examples of companies that got some of the important decisions wrong in business. Sometimes these decisions were cash management decisions. Other times they were strategic—like misreading economic, social, technological, international, or legislative changes. Some grew so fast and imploded or exploded and are buried on the superhighways behind us. There are too many to name here, but reminders of such companies include People’s Express, KB Toys, Blackberry, Nokia and Motorola, to name but a few.
Jim Picariello, CEO, Wise Acre Frozen Treats from Blue Hill, Maine, is like so many smaller companies that grew too fast and went broke. (Read his article on his mismanagement mistakes: http://www.cbsnews.com/news/my-company-grew-too-fast-and-went-out-of-business/.)
The problem with some growth companies is that owners don’t understand the risks that lie ahead of them. In other words, they don’t see the train wreck three miles down the tracks. They just don’t have the experience to foresee what might happen, or perhaps they are too arrogant to accept their own shortcomings or shortsightedness. Maybe it is that they are afraid to invest in their education and learning.
Without expert guidance or experience, some owners’ abilities to predictably generate profits and cash flow in the business may deliver short on its promises to its owner and shareholders. Don’t sell yourself or your company short by being afraid to invest in your business. Get a Gazelles coach today who can educate you on how to build your growth company profitably— to generate cash and increase shareholder value.
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