In business, it’s generally most fun to talk about marketing campaigns, product launches, and expanding into new markets. But if you aren’t having the “money conversation” with your management team on a regular basis, you may be setting your business up for potential challenges that could otherwise be avoided. Over the years, we’ve found that most SMB financial issues fall into the same five buckets, regardless of the organization or sector.
1. Misunderstanding the Cash Conversion Cycle
The Cash Conversion Cycle formula is easy to understand as a concept (Days Inventory Outstanding plus Days Sales Outstanding less Days Payable Outstanding) but can be incredibly difficult to manage. Many SMBs, which operate with limited accounting and finance support, have a hard time juggling cash collections, inventory turns, and vendor payments all at once. Most often, a company is managing customer terms promised by a sales team to drive revenue, supply plans determined by operations to ensure nothing is out of stock, and shorter payment terms negotiated by buyers to secure the best product.
The disconnect between these teams and their goals can put a strain on cash and potentially cause major problems to the underlying business plan. In order to be successful, management needs to have a deep understanding of each cog in this wheel to service the cash requirements of the business and to help mitigate any potential conflicts.
2. Failing to Identify Financial Bottlenecks
Identifying the financial bottleneck in your company can be a tricky one. You may find yourself saying, “Why is new customer growth just not there?” The easy assumption might be that all of your competitors are pumping money into customer acquisition, thus making it harder to find new veins of gold. However, if you dig a little deeper, you may find that the customer experience is underwhelming which compels you to spend harder on customer acquisition to bring new customers into the fold. Many times a dated storefront, sub-optimal product assortment, or a lack of customer service is the biggest inhibitor to growth and is the true bottleneck making your capital work harder. Identifying those internal pain points can drastically reduce cash outlays by guiding where your capital should be spent in order to achieve your company’s desired growth.
3. Lacking Cash Levers and Lines of Credit
Financial forecasts are notoriously wrong. There are revenue misses, margin contraction, and unexpected expenses which often leave SMBs facing unforeseen circumstances and/or new challenges on a monthly, weekly, and even daily basis.
As a result, it is crucial to identify levers to slow or stop inefficient cash burn when it begins to balloon. Identifying the right levers can slow down or stop the burn while you wait for the business to course-correct. However, if your levers are marketing spend or product delays then you may be compromising the trajectory of the business. A modest line of credit can help you navigate a rough patch and can allow the company to continue to execute its strategy without restricting marketing or product spend.
4. Focusing on Too Many Metrics
Measuring performance is paramount to tracking the progress and the pulse of a business. However, having too many Key Performance Indicators (KPIs) usually creates unnecessary complexity. Employees with too many metric goals end up spending more time updating their scorecards each week, rather than focusing on executing strategy—the crucial performance driver for any company. To solve for this issue, limit tracking to the five most important metrics that drive the performance of your business. This will keep the team focused on achieving results, rather than checking a box.
5. Waiting Too Long to Bring in a Financial Professional
Many issues can be solved by having the right people in optimal roles, which is why hiring the right finance professional is critical. Regardless of title, financial leadership tends to be the final addition to management teams, which is often the reason many SMBs struggle. Having a robust understanding of working capital, return on invested capital, and how to partner with key departments to drive value is especially critical for SMBs. That skill set may not reside with an accounting manager or controller, and spending the extra money to get the right finance professional pays itself back far faster than most people think.
At Norwest, we have 150 active portfolio companies across all stages and sectors, including startups and bootstrapped, founder-owned SMBs, so we know the challenges and triumphs that come with building a business. While the advice here is not necessarily “one size fits all,” we think most SMBs will find value in at least a few of these lessons learned.
Don’t forget to regularly have the “money conversation” with management and stay mindful of these five pitfalls. By following these guidelines, SMBs can get ahead of potential problems and improve overall business performance at each step of the journey.
About the authors: Jon Kossow is a Managing Partner at Norwest where he leads the growth equity practice and focuses on investment opportunities across a wide range of sectors, including information services, software, internet, and consumer.
Joe Fisch is the CEO of Wine Access (a Norwest portfolio company) and has over 10 years of experience in leading and advising retail and consumer companies to improve their financial growth strategy and planning process. Prior to Wine Access, Joe held leadership positions in finance at Ghirardelli Chocolate Company and PwC.