First let me preface by saying it’s not your fault. School doesn’t teach you money. It teaches you math (2+2=4), but in money 2+2=2.5. Why? Truth is there are a myriad of reasons, but to keep it simple, here are three:
1. Time value:
The value of money diminishes over time. What a dollar could buy as little as a year ago, that same dollar cannot i.e. candy bars last year on average were $1.29, today they are $1.39 and up.
2. Cost of money:
When you borrow money it usually has a positive rate associated with it i.e. 5,10, 20%. This is your cost of funds. We educate that the cost is not as important as the return. If it cost 20% but my return is 60% it may be worth it. Obviously, this is a case by case basis.
3. Cash flow:
When you are extending credit to your clients or customers you are minimizing your access to utilize that money as you see fit. Therefore; you must consider and monitor your outstanding receivables vigilantly, as the longer it is outstanding the less buying power it has.
How does this apply to you?
Time value: by understanding this you can price accordingly to reduce diminishing return. When you have financial controls in place you will know your average outstanding receivables timeline, therefore you can plan accordingly. Create a budget and better manage sales cycles, inventory, production cost, etc.
Cost of money: always understand return v. borrow ratio. If your cost of funds is high make progress to adjust. Interest rates are in direct relationship to risk, so if you minimize the risk you will qualify for lower and preferred capital. We work with our clients to segue them to sustainable capital by solving whatever is classifying them as high risk.
Cash flow: Develop collection practices to minimize how long receivables are outstanding. Develop a credit policy. Sales with no cash flow will drive you out of business. We offer outsourced bookkeeping, Controller and CFO services to implement and maintain financial processes, collections and credit risk assessments.
Irrespective of the size of your organization, finances are regarded as the life blood of the business. One of the unavoidable responsibilities for the CEO is to ensure the company has sufficient funding. For beginners to intermediate level, Financial Fitness aligns your finances with your business goals. For master’s level, see our Financial Mastery services.
In the 17 years we have been in business assisting other businesses with achieving next level growth, money was never their problem only their symptom! By addressing the other aspects of the business that needed fixing and aligning them with sustainable capital, they rarely had a money problem again.
Author: André Wilson is Managing Partner & Funding Maverick at Altima Business Solutions. Altima Business Solutions brings expertise, skills, talent and resources to ensure businesses achieve next level exponentially.