Who Controls Your Business?
On the face of it, this looks like a strange question. You may be thinking “I’m the majority shareholder! I’m a Director in the business. Basically, I call the shots”. Whilst all this may be true, it may not be who is really in control of your business.
I’m not referring to issues of ownership, to the composition of your Board of Directors, or to who owns what percentage of your company. The pressures on a small business come from many different directions. These pressures can influence your business and ultimately control your operations.
The first pressure your business may face, and generally the most common, is cash flow. One of my clients expressed this reality well when he said “I don’t manage a business, I manage cash flow”. When cash flow is an issue, you’ll find it drives decisions in ways you would prefer not to go. Problems with cash flow can have a huge impact on your business, causing you missed opportunities, restricted growth, increased levels of stress and possibly a lot worse! Poor cash flow can be a serious risk to your wealth.
Cash flow problems, may be a symptom of a bigger issue but may reflect the power and nature of your customers or suppliers.
Your customers exert power over your cash flow through both accounts receivable, the amount and type of business they give you and the profit they allow you to make. Accounts receivable represent the sales that have not yet been collected in the form of cash. If your customers are taking too long to pay you, this could leave your business cash-strapped even though you may be making a profit. Your credit terms and credit policies could be hampering a healthy flow of cash in your business. Lumpy inconsistent business is much harder to manage than constant recurring income. Low profit margins could be reducing the amount of cash in hand you have, to pay your bills.
Be careful of the level of concentration in your revenue base. What percentage of your sales are comprised by your top 5 customers? If 1 or 2 of them went elsewhere how would that impact you. Model the impact of a 20% and 40% drop in revenue on your business. What would you do if these things happened ? How can you mitigate against the risk of this happening and how can you mitigate the impact if it does?
The prices and payment terms your suppliers give you can greatly impact your the stability of your business and cash flow. Accounts payable are amounts you owe to your suppliers that are payable within the near future. If your suppliers are increasing prices, demanding faster payments, or even withholding stock, they could be controlling your cash flow.
As with customers be careful of your supplier concentration. How exposed is your business to its key suppliers?
If you’ve taken out a loan with your bank, they may have significant control over your business. Your bank will determine the repayment terms and interest rates on your loan. In some cases, they may have granted you a loan on condition that you adhere to tight restrictions or restrictive covenants. They may also want regular updates on your finances, and may not be happy with what they see. This could force you to make decisions and take actions that aren’t necessarily what you wanted. Banks are great but have teeth and will be looking at their own interests, not yours if things go wrong.
What about your key employees. If they have valuable information about your operations such as company specific insights, or your client list, they can hold you hostage in certain situations and influence your decisions and courses of action.
So who controls your business?
My initial question probably doesn’t seem as funny anymore. It’s easy to think you’re in control, but other forces may actually be at play. In my next blog post, I will talk about how you can start regaining power over your business. If you’re concerned about these or other control and risk issues do get in touch today. We’d be happy to have a quiet chat.