Cash Flow Management and Cost Controls
There’s a common reason why businesses fail, and that’s cash flow. This is especially true for rapidly growing businesses.
When your business is growing fast, the most valuable thing you have as a CEO is your time. You need to be in control of the rudders on the ship and you really don’t want to be worried about chasing cash. So what can you do to confidently manage cash flow during rapid growth in your business? Optimise your pricing and review and readjust your spending.
Cash Flow problems cause you to not re-examine your pricing model or experiment with value pricing because you are too scared to lose business. CEOs sometimes tend to make the mistake of offering discounts to generate cash when cash flow is fluctuating as a quick fix. It may feel like the right decision because you feel the urgency, but the long term effect is not sustainable. If you have a solid pricing model and a plan to experiment with value pricing, you won’t get backed into making ad-hoc pricing mistakes that will end up having long-term effects. How well you price your products/services and the margin it produces is the key to maximising cash flow.
When your business is in the midst of rapid growth, you’re often faced with big spending decisions to advance your business’s infrastructure – location, hiring, inventory, equipment, technology.
Fine-tuning these areas of cash flow management enables your business to be scalable. Scalability will help you successfully grow and adapt to increased volume without compromising on quality, performance, service, or any element that’s key to your business.
Also, in terms of spending, you want to take educated risks – By tracking valuable KPIs over the year, you can gather actionable financial intelligence that will help you quantify ROI and make good long-term decisions on spending.
While there is no such thing as 100% assurance, knowing that there is a strong internal control structure in place that includes both preventative and detective controls should give you the comfort to be able to sleep soundly at night. Evaluation of your current internal control structure includes asking the “How do you know?” questions for each business process:
How do you know all of your cash is being recorded completely, and you are recognizing revenue accurately? How do you know you’re hiring the “right” people?
If you’ve answered “I don’t know” to any of the above, then there may be areas where you have control gaps. You want to look closely at each process, identify these gaps and assess the risks associated with them.
Filling out expenses is time-consuming, receipts get misplaced, and employees often categorise expenses incorrectly. Companies like Travelport Locomote, get their employees take a photo of their expense receipts. The company then uses software that scans data such as the date of the expense and the amount spent from the receipt and automatically categorises it, which means the only information employees have to enter manually is the name of the guest they entertained at the meal they are expensing.
Ultimately, Travelport Locomote is leveraging technology to reduce human error and improve internal controls at the same time as reducing the burden on employees.
Usually, finance and strategy teams have been tasked with working together to promote corporate growth. Now, new research has shown that you need to consider risk management—to achieve sustainable long-term growth for your business.
But taking such risks does not come naturally for most companies. In fact, in 2016, 77% of CFOs reported that the amount of risk aversion from executives in their organization rose from the previous year. What these executives do not understand is that, like cholesterol, there are good and bad kinds of risk. Bad risks are more obvious and distinguished by recklessness and wrongdoing. These are what the risk management function is normally associated with—putting controls in place to keep bad things from happening. But companies need to take risks to grow, and there is a role for risk management to play in helping with that.
To get this right, finance, strategy and risk management teams need to join forces. This presents risk management with an opportunity to demonstrate its value by enabling senior leaders to make high-risk growth decisions. Risk leaders can help companies change their approach to new growth opportunities by taking three key steps:
Coordinate risk and strategic planning.
Discuss risk appetite within the appropriate context.
Develop an active risk appetite.
The above shows that risk management, cash flow management and controls, are key to efficiency when you’re juggling the finance challenges of a fast-growing company. If you’d like to talk to us about how you can move your business forward whilst facing these challenges, feel free to get in touch.