One of the biggest mistakes that businesses routinely make involves implementing a strategy without considering the impact on cash flows. Even if a business strategy is profitable, it may bring a business to its knees through a leakage of cash. Upon first glance, this statement seems like a little bit of a contradiction. How can a strategy be both profitable, yet detrimental to a business by costing it cash?
Let’s take a look at a quick example. Let’s assume that a business decides that it wants to aggressively grow its customers base by 10% in the next 12 months. Let’s assume that this business wants to achieve this goal through a traditional marketing. Let’s also assume that the business is successful in achieving this objective.
If the business relies on providing its customers with credit, the business may record a profit on paper. But what if it doesn’t have the right systems in place to make sure that customers pay on time? What if the right credit approval facilities weren’t implemented or if the payment collection system the business is using are inefficient? While the business has made the sale, the prospect of receiving payment in a timely manner becomes questionable.
What about the actual marketing campaign itself? Have the effects of any promotional offers being made, such as generous payment terms or product discounts, been thoroughly analyzed? How will these offers affect cash flow?
If a business is looking at implementing a growth strategy through a marketing campaign, then it should be looking consider factors such as the campaign budget, the expected range of customer conversions (customers won) and the expected attrition rate (customers predicted to leave).
Having this information will help you do several things. For one, it will allow you to compare the campaign budget to historical rates. By making this comparison, it may be possible to establish where a bump in cash reserves or additional funding may be needed. Understanding the average order size, repeat business rates, attrition rates, and the impact that special promotions have on cash flow will help you ensure that the marketing campaign and business doesn’t run out of cash.
When considering strategy, it’s also important to look directly at what your company will need to do logistically to achieve the desired operational result. Consider this; if a business is indeed pursuing a growth strategy, can the company’s current infrastructure and workforce accommodate this expansion?
For example, if you have a customer service center, will it be able to handle the larger volume of customers, or will more customer representatives need to be added? And if yes, how will that affect salaries, benefits and payroll taxes? If you have a factory; can the factory accommodate the larger demand? If not, how much will it cost to build out the infrastructure, or will some of the work need to be outsourced?
Looking at the actual operational needs of the company from this perspective will enable you to plan accurately. You are no longer thinking in the abstract realm of percentages of growth and returns on investment. Instead, you are looking directly at the cause and effect relationship between operational steps that are needed to achieve strategic goals and the cash flow that will be needed to cover these efforts.