In our Fall 2019 issue, business advisor Phil Symchych started a discussion on the ‘Six Keys to Sustainable Business Growth,’ which has inspired a series. In his sixth and final article of the series, he looks at how to strengthen your business’s financials.
As I was standing on the hot pavement waiting for our car to arrive at a stuffy Las Vegas hotel, my phone rang. It was a potential client, let’s call him Jake, who was just turned down by his banker for a loan. The banker told Jake he had a pretty good business but didn’t qualify for more financing. The banker also told Jake to call me.
You see, the banker wanted to lend Jake more money. High growth businesses make bankers nervous. To qualify for more financing, Jake needed to demonstrate financial acumen and a healthy balance sheet.
Over the last year, every business has learned the importance of cash flow and a strong financial foundation to weather the storms caused by global pandemics, strangled supply chains, and queasy customers. Yet many businesses, especially small businesses, weaken their financial foundations because of three problems.
First, they wing it and don’t plan for success. Second, they chase revenues instead of profits. And third, they focus on minimizing taxes. Addressing these three points will definitely strengthen your financial foundation.
Planning for success means that you know your numbers, which we discussed in the previous issue, so you know which products, services, and customers make you money or cost you money. From this knowledge, you develop marketing plans to promote your most profitable services. You create cash flow forecasts and budgets to monitor performance on your plans. You monitor your progress and adjust your plans at least monthly.
Next, many companies suffer from small-business-itis which is a condition where they remember the stress of cash flow when they were a tiny business. Even though they’ve grown way past being a start-up or even a small business, they still chase every dollar of revenue as if they were all the same. They don’t prioritize profits. Profits will fund your own growth and help to strengthen your balance sheet so your banker will want to help you fund even more growth.
Finally, we get to the most common problem afflicting many small businesses, according to every banker I’ve ever met: minimizing taxes. This terrible strategy will minimize your ability to grow because it constrains your ability to borrow. Debt is very cheap fuel for growth but you need to qualify for it.
When you minimize taxes, you reduce the profits retained in your business. These profits, if not eliminated through aggressive tax strategies, would sit on your balance sheet as retained earnings. Retained earnings give bankers comfort to lend.
Now, if you are a large company with lots of cash in the bank and not focused on growth, go ahead and minimize taxes.
However, if you’re growing and need cash, this message is for you. To your banker, your balance sheet is more important than your income statement. You see, you banker knows you can’t build a strong balance sheet without having had successive years of good earnings and financial management.
Your banker wants to lend you more money but the banker needs to see two things. They need to see retained earnings on your balance sheet to support their debt-to-equity ratio. Remember, retained earnings come from after-tax profits. Bankers also need to see operating cash flow sufficient to service the debt. Operating cash flow comes from good working capital management.
Putting this all together, here is what I did for Jake.
- We analyzed the gross margins for different services, increased prices on the lower ones, and put together a business plan and a budget showing controlled growth.
- That’s right, we slowed things down—temporarily—so we could build up profit and cash and demonstrate to the banker that we had financial control of the company. If you can’t control your company’s growth, then that’s too high a risk for any banker to take.
- After a year of improved financial management from budgets and discipline, we increased profits. The banker was happy to lend more money. The banker’s ongoing support combined with strong financial management helped Jake’s company to continue to grow profitably for several years.
Your business growth and your ability to create business wealth for your shareholders is limited to the foundation you have supporting that growth. What is your plan to strengthen your financial foundation?
Phil Symchych CPA, CA, CMC, MBA, ICD.D is celebrating his 27th year in business. He is the president of SME Business Wealth Builder Corporation and helps companies to grow profitably, protect value with succession planning, and build business wealth for shareholders. He can be reached at 306-992-6177 or Phil@SMEWealthBuilder.com.
