Several entrepreneurs with fast growing businesses told me they have recently made cost reductions in response to slowing business and the economy. One business owner told me, he and his CEO cut $600,000 of annual expense from their operating budget in 45 minutes!
The more interesting thing was they all also said, “I wish I had done this two years ago. We don’t even notice the impact of the cuts.”
Why this happens:
Entrepreneurs particularly of fast growing companies often get overly fixated on revenue growth. Its understandable, why this happens. Revenue is easy to measure and its common sense to expect cash flows to increase as revenue increases. However, on a percentage basis many companies I meet for the first time, experience the exact opposite. Revenue growth is faster than cash flow growth.
Cash flows from on-going operations should grow FASTER than revenues.
Many growing companies experience the exact opposite. Revenue grows quickly but cash flow as a percentage of revenue goes down.
To address this businesses should look to do a couple of things:
1) Develop detailed projections by major expense account so you can set expectations about your various categories of cost. Someone once said, watch out for overhead costs. They can grow like ‘barnacles on a ship.’ That is once they are there, they are very difficult to remove.
2) Expect Personnel to Do More as Business Grows – Create an expectation that as your business grows, you won’t simply hire more people but expect your existing people to do more. I find the busier people are the happier they are. Also, you can afford to pay them more which further helps retention over the long run.
3) Be ‘cheap’ on corporate infrastructure – The goal of business is to make money. Great companies don’t need great offices to become successful. I remember a very successful HMO that sold for $1Billion operated its business out of a strip mall. That may seem extreme but you probably get the idea.
4) Separate Costs for Growth from On-Going Operations – Businesses that are growing rapidly often have to spend money today that will be used for the future. Examples would be software purchase, opening new stores or locations, or buying new equipment. When you analyze your business, separate those costs so you can easily see what cash flow your business is generating from on-going operations. Again, you expect this adjusted number to INCREASE as a percentage of revenue as your business grows. If its not, look into the reasons why. It may be do to growing overhead too much or even raise questions about the soundness of your business model (i.e. operating plan).
There is any number of ways to increase cash flow. Probably the most important is for entrepreneurs to realize that’s the MORE IMPORTANT than just revenue growth.