Incisive Financial Understanding

What does 'working smarter not harder' really mean?

If you are short of cash there is evidence to suggest that, in some businesses, working harder simply compounds financial problems.

We long ago lost count of the number of times we heard entrepreneurs relating how they were told to simply 'grow themselves out of trouble'.. This is invariably a recipe for disaster; innocent advice given by people lacking the necessary cash flow understanding which has, in some cases, had terrible consequences.

But at the same time one can understand why one might be inclined to think this advice should work.

Take 2 businesses:

• The first works 5 days a week, 7 hours a day. They make lots of money
• The second works 5 days a week, 7 hours a day but makes no money.

Both decide to work 24 hours a day, 7 days a week. Which business(es) will make money now?

Whilst there might be rare exceptions, in practice, the second business typically gets into deeper trouble.

What's wrong with Sales?

In short, absolutely nothing - the essential lifeblood of any business. And if sales should completely dry up - which has proved the case for some in recent times - any sales are, of course, welcome.

But cash flow is particularly sensitive to sales - both in terms of profit margins and time taken to receive payment.

And looking at a business as a whole, how the dynamics of these relationships play out in terms of cash flow are all too often poorly understood. In our experience many companies absorb (rather than create) cash as they grow. And this has profound implications.

Systems don't tell you what you need to know

When commercial businesses (or social enterprises for that matter) rely on cash flow forecasts based on the next 4 weeks of expected cash-ins and cash-outs (which many do) they simply don't have the necessary overview to assess whether they are creating or absorbing cash and the sales / margins needed to keep or put the operation on an even keel.

In the face of growing financial pressures it's human instinct for entrepreneurs (like anyone else) to revert to something they feel they do understand and can effect some influence over. For many this means chasing new business and / or burying themselves (i.e. working harder) on operational issues. Little time is spent on finance per se to understand how things fit together aside perhaps from some quick-fix cost cutting, hoping this will prove to be enough.

So ultimately, the risk is terminal - a business simply runs out of cash. And it feels like this must be down to a lack of sales. But in truth the underlying financial design of the business often plays a big part. In simple terms, put more sales through a business that has hitherto struggled to see this translate into a better bank balance and it will make precious little difference. But routine financial systems don't offer this sort of insight.

Who is most at risk?

Truth is, few businesses are completely immune to the perils of the working harder syndrome. Retailers are generally less exposed, but even here a balance has to be struck between discounts, sales volumes and the ability to meet overheads and payables commitments. And even more so now when demand is fundamentally weak. Indeed, this is evidenced by pressures put on suppliers by the likes of Iceland and Alliance-Boots (who, in turn, have their own financial issues).

But the cash flow dangers of working harder to compensate for tougher market conditions are probably greatest for those in sectors like construction and engineering.

Those operating in the construction sector are particularly exposed. Not only is their business essentially contractual, making sales levels particularly difficult to predict but they also tend to have large funding-needs. And lenders (for good reasons) are reluctant to get too over committed.

If you would like to understand cash flow better you might like to consider our entrpreneur training. Some have used this (successfully) as the basis for a 'DIY turnaround'. Or, if you have particularly pressing concerns about your current situation, you can see examples of how we have helped others with business financial problems or call us in confidence and without obligation.