These days, entrepreneurs and managers in growing companies find themselves searching for cash to fund their growth. A surprisingly good but often neglected place to look for it lies right under their noses--on the company's balance sheet. Finding hidden cash on a balance sheet by using some simple analyses beats going hat-in-hand to the bank. The analyses here also provide metrics that everyone in the company--from sales manager to accounting clerk--can understand and use. Best of all, the only things you'll need are last month's financials, a calculator, and a cocktail napkin.
Everyone knows that starting a business requires cash, and growing a business requires even more. But few people understand that a profitable company that tries to grow too fast can run out of cash even if its products are great successes. So a big challenge for managers of any growing concern is to strike the proper balance between consuming cash and generating it. Authors Neil Churchill and John Mullins offer a framework to help identify and manage the level of growth that a company's cash flow can support. They present a formula to calculate an organization's self-financeable growth (SFG) rate, taking into account three critical factors: a company's operating cash cycle--the amount of time the company's money is tied up in inventory and other current assets before customers pay for goods and services; the amount of cash needed to finance each dollar of sales; and the amount of cash generated by each dollar of sales. The authors offer a detailed hypothetical example that carefully considers these three factors; they then illustrate how a company can influence its SFG rate by carefully managing some combination of those factors.
Budgets have two primary functions: planning and control. Companies must decide which function is most important and then resolve a number of formulation issues. Most companies use budgets to evaluate, to some extent, division managers' performances and tie bonuses to the attainment of targeted goals. But while large companies concerned about operational efficiency may want to focus on the coordination and control aspects of budgeting, small and innovative companies may be more concerned with planning aspects. How well a budget succeeds depends on the management systems in place and on the way senior executives view the budgeting process.
A five-stage framework will help owners to determine their company's stage of development and how to ensure a profitable future. It is also useful to consultants and accountants in diagnosing problems and matching solutions to smaller organizations. The five stages are existence, survival, success (with the substages of disengagement and growth), take-off, and resource maturity. Each stage has an index of size, diversity, and complexity.