Tag Archive for 'cash flow'

Managing the three clocks of small business

“Time Is On My Side,” is the title of one of the classic rock ’n’ roll songs performed by Mick Jagger and the legendary English band, The Rolling Stones.

This bold statement works in a song, but for small businesses – not so much. The reason is because of the complicated dynamic between our most limited resource, time, and three of our most important business factors, expenses, sales and cash.

In the marketplace, there are actually three different clocks at work that every business uses: one for operating expenses, one for sales and one for cash. Let’s take a look at how these three clocks impact your small business.

Operating Expense Clock
Every month like clockwork, regardless of sales volume, cash collections or profitability, payroll must be met, rent must be paid, taxes must be remitted, plus phone, utilities, insurance bills, etc., must also be paid. The Operating Expense Clock is hardwired to Greenwich, England for accuracy within a nanosecond per millennium, and nothing stops it short of a global, thermonuclear holocaust coinciding with a direct hit from Haley’s comet.

The only way to influence this clock is through operating efficiencies – you won’t be billed for what you don’t buy.

Sales Clock
This clock is powered by the prospect and customer relationships you’ve created so sales result each month. You project when each sale will occur by qualifying prospects and attributing a clock to each potential transaction so that you can budget future sales volume, which delivers gross profit to pay expenses.

How the Sales Clock operates is completely logical and intuitive, but it only works in your favor when meet all of the expectations and requirements of customers.

Cash Clock
What is not logical or intuitive is the Cash Clock and its relationship with the other two. Think of it like this: Cash is to sales as snow is to cold. You can have cold weather without snow, but you can’t have snow without cold weather. You can have sales without receiving cash, but you can’t receive cash without making sales. And expenses are like weather: you get some every day.

But what hits small business owners hard is that for every glitch in the mainspring of the Sales Clock, there are 1,000 potential sprocket failures that slow or stop the Cash Clock. Consequently, the Cash Clock requires constant maintenance.

Surely, Murphy was a small business owner, because his law lives inside the Cash and Sales Clocks. But the Operating Expense Clock is immune to this insidious law and keeps on rockin’, just like The Rolling Stones.

Write this on a rock … Your success requires a full understanding of the three clocks of small business.


11 financial fundamentals every small business CEO must know

Regardless of the size of the business, ultimate responsibility for success lies with the CEO. If you’re a small business owner, that’s you. And the most critical CEO tasks that result in success or failure lie in the knowledge and practice of financial management fundamentals.

Statistics show that over half of small businesses fail within the first four years. Clearly that mortality could be significantly reduced if, before a business opened, the founder/CEO was required to pass a course that teaches business financial fundamentals and how to operate a business with them.

If you could use a little help in this area, allow me to identify some of the key elements that would be part of the curriculum of such a course.

-  CEOs shouldn’t do their own accounting, but successful ones learn how to manage with regular (at least quarterly) financial statements (balance sheet and profit-and-loss) that an internal and/or external accountant produced.

-  Successful CEOs know what their gross profit margin needs to be and what it is.

-  Smart CEOs track monthly sales-to-expense ratios in order to know when to adjust spending.

-  Savvy CEOs monitor inventory levels against projected sales, receivables and cash.

-  Real CEOs know how to calculate Accounts Receivable days and Accounts Payable days, understand the relationship between the two, and the impact of that relationship on cash.

-  Disciplined CEOs develop a capitalization strategy that blends retained earnings with short and long-term capital sources, like bank debt.

-  Capable CEOs identify the critical financial indicators and ratios that are revealed on the balance sheet and its relationship with the profit-and-loss statement.

-  Surviving CEOs believe and prepare for the cruel irony of how sales growth becomes dangerous when not properly funded, indeed, that you can succeed yourself out of business.

-  When a business isn’t profitable, professional CEOs identify the top impediments to profitability and deal with them quickly, decisively, and without emotion.

-  Perennially successful CEOs delegate many things well, but they stay close to the company’s cash picture from tomorrow to the next 12 months.

And finally, arguably the most important financial management CEO discipline:

-  Understand and monitor the relationship between Blasingame’s Three Clocks of Small Business: The Expense Clock, the Sales Clock and the Cash Clock.

If you already own a small business and cold sweat is popping out on your forehead right now that should motivate you to kick your financial education into high gear and become an expert on these fundamentals.

If you haven’t started your business yet, don’t until you can pass this course.

Write this on a rock … The ultimate responsibility for your business’s financial performance belongs to the CEO - that’s you.

To listen to Jim talk more about the 11 financial fundamentals for CEOs, click on one of the links below:

6 financial fundamentals every small business owner must know

5 of the 11 most important small business financial fundamentals

Blasingame’s Law of Sales Pipelines

Selling is a numbers game. Do you know how to manage your sales to plan future revenue? Watch as Jim explains the sales pipeline and how to use it to forecast sales, revenue and cash flow.

Watch more of Jim’s videos HERE!

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Check out more great SBA content HERE!

How does a small business fund growth?

Large, publicly traded businesses have a vast array of options when they want to capitalize growth. Small businesses? Not so much.

In fact, there are only three primary sources of growth capital for a small business:

1. Equity capital from the founder(s) and/or outside investor(s).
2. A combination of operating cash flow and profits left in the business, aka, retained earnings.
3. Borrowed funds, typically from a financial institution.

Because borrowed money is the significant small business source of capital, we asked our radio, Internet and Newsletter audiences the following question: “In terms of using a loan to capitalize business growth, which of these four options are you more likely to choose?”

Those who said they would use a national or large regional bank represented 13% of our respondents. Independent community banks came in at 31%, followed by credit unions, at 22%. And those who chose the last option: “We don’t need no shtinking bank loan!” were 34% of our sample.

It’s not surprising that over half of our respondents would prefer a local capital source like an independent community bank or credit union. For over a decade, I’ve been telling small business owners that the most consistent banking relationships, through thick and thin, are with locally-owned institutions that practice relationship banking. The financial crisis of 2008-9 turned my advice into a prophecy.

That crisis shined a bright light on at least one unfortunate truth: Banks that are beholden to Wall Street analysts and the computer-generated credit score are fair-weather friends to small businesses. It’s likely that the same poll taken pre-2008 would have produced more than 13% support for these banks.

Those who chose the emphatic “no shtinking loan” option, representing the largest single group, track with the prevailing small business sentiment in other polls I’ve reported on lately. Many small businesses are just not yet ready to use financial leverage to fund growth.

This group is either among that two-thirds of small businesses that polls show are not experiencing growth, or are among the other third that are growing but have learned how to do so more organically, which is another way of saying, “We don’t need no shtinking loan.”

A small business should have at least one banking relationship with an independent bank or credit union.

I talked more about how small businesses are funding their growth in the new normal today on The Small Business Advocate Show. I also talked with my good friend and Brain Trust member, Gary Moore, founder of The Financial Seminary and author of several excellent books on investing, about the advantages of having a relationship with an independent community bank. Take a few minutes to listen and give us your recommendations of large banks or smaller community banks. with Jim Blasingame

How small business owners are funding growth with Jim Blasingame

In praise of the independent community bank with Gary Moore

Your small business, your banker and economic recovery

A small business is like the human body in at least two ways: To survive, it must have both nutrition - food and water - plus oxygen. For a business, nutrition is profits, and its oxygen is cash flow. And similar to the body, a business can survive for a while without the nourishment of profits but not very long without the breath of cash flow.

Arguably, the greatest reasons small businesses fail is they run out of cash. And as improbable as this may seem, even businesses with plenty of sales revenue - if cash is not collected in time - can fail. Every growing business, large or small, needs access to cash resources that can smooth out the operating cash rough spots. But for a small business, those resources are few in number, with the primary source being a loan from a bank.

If there is one thing that I have harped on for the past dozen years, it’s the importance of a small business establishing and maintaining a close working relationship with a bank. Furthermore, a decade before the financial meltdown of 2008-9, I began encouraging small businesses to make sure at least one of their bank relationships was with an independent community bank.  That advice turned out to be prophetic.

Recently, on my radio program, The Small Business Advocate Show, I talked about getting your small business ready for the coming expansion and building better banking relationships with an outstanding member of my Brain Trust, John Dini. We discussed some of the elements of growth that you should begin planning for right now, including a capitalization plan that includes a closer relationship with your banker. John is the leading Tab Boards franchisee in the U.S., President of Management Performance Network and author of 103 Tips for Better Hiring.

Take a few minutes to listen to our conversation and, as always, leave your thoughts on banking relationships and how you’re getting your business ready for the coming expansion. Listen Live! Download, Too!

The Three Clocks Of Small Business

Ti-i-i-ime is on my side - yes it is.

So sang the legendary Rolling Stones singer, Mick Jagger. As lyrics in a ballad this is a nice sentiment, even romantic. But in small business, it’s hogwash.

In the marketplace, there are actually three clocks at work: one for operating expenses, one for sales, and one for cash. Rarely are any on the side of a small business.

The clocks that tick on sales and cash collections often seem to have hands that drag or even get stuck, while the clock that is in control of expenses is so well oiled and finely tuned that the hands seem to fly around the face.

Let’s take a look at the three clocks of small business.

Operating Expense Clock
Every month, like clockwork, whether sales are good, cash collections are on schedule or profits exist, payroll must be met, rent must be paid, taxes must be remitted, plus phone bills, utilities statements, insurance premiums, etc., ad nauseum, must also be paid.

The Operating Expense Clock is hardwired to Greenwich, England for accuracy within a nanosecond per millennium, and nothing stops it short of a global, thermo-nuclear holocaust, coinciding with a direct hit from Halley’s comet. The only way to influence this clock is through operating efficiencies - you won’t be billed for something you don’t buy.

Sales Clock
This clock runs off the customer relationships you’ve created so that sales result each month. You project when each sale will occur by qualifying prospects and attributing a “clock” to each potential transaction so that you can budget future sales volume.

The Sales Clock is completely logical and intuitive. A sale will be made made only when a prospect’s purchase requirements have been met.

Cash Clock
What is not so logical or intuitive is the Cash Clock and its relationship to the other two clocks. Think of it like this:

Cash is to sales as snow is to winter:

  • You can have winter without snow, but you can’t have snow without winter,
  • You can have sales without cash receipts, but you can’t have cash receipts without sales.

And expenses are like weather: You get some every day.

But what every small business owner knows is that for every one glitch in the mainspring of the Sales Clock, there are 1000 sprocket failures that can slow or stop the Cash Clock. Consequently, this clock requires constant attention and maintenance.

Murphy’s Law flourishes inside of the Cash Clock and is a frequent resident in the Sales Clock. But the Operating Expense Clock is totally immune to Mr. Murphy’s insidious law and rocks on just like The Rolling Stones.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the three clocks of small business. I also had a conversation about cash in an interview with Brain Trust member, Phil Holland, founder of My Own Business. Take a few minutes to listen to these conversations on this important topic and, as always, be sure to leave a comment.

My commentary:
My interview with Phil Holland:




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