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Knowing When to Invest in the Growth
of Your Business
By David Rosenfeld, CPA
Entrepreneurs often start their business with one or two ideas, ingenuity, and a little cash. As the business grows, the entrepreneur invests (increases expenditures) in areas where he/she sees the likeliest area of return whether it is capital, equipment or staffing. As your business moves forward, you continue to make investment decisions based upon the same criteria.
Then, the economics and psychology of a recession hit, just as it has the past few years. The business owner naturally moves into a defensive position by quickly cutting expenses, reducing debt and taking over more control of the day to day operations. This most recent downturn has been longer than most business owners have seen in their lifetime. As such, as they have reduced their expenditures, the business owner is nervous about increasing expenditures until they are "sure" of the opportunities for growth.
The entrepreneur knew when they started the business, the opportunity for success was in the market, and it just needed to be exploited. Now that the business is running, but has gone through a slowdown, the business owner needs to revert to his/her entrepreneurial mode. How does the entrepreneur wisely make the shift to a growth orientation?
A quality CFO can support the entrepreneur well in this area. Most of the time, people think of CFOs as people to help keep costs down and protect assets. A good CFO does so much more. A good CFO can identify many indicators of a change in the market:
1. Has the amount of sales/orders the company receives reached a floor and begin to turn up (even slightly)?
2. Has the ability to hold prices in negotiations with prospects improved? (indicates a stronger, competitive position as well)
3. Are more prospects asking for quotes?
4. Are you delivering more proposals?
5. Is the time to receive parts from suppliers increasing?
6. Is your banker talking to you about how the bank can be more of a partner?
7. Is it becoming a little more difficult to find good "talent"?
Other ways the CFO can identify if/when it is time to invest in growth opportunities would be to look at the balance sheet of the company and understand its strengths and/or weaknesses:
1. Is your debt to equity ratio low? If so, the business owner can leverage the business to invest in both human and equipment capital.
2. Are your current customers becoming more prompt payers? If so, your customers may be improving as well.
3. Are you managing your working capital well, minimizing investment in inventories?
Additionally, a strong CFO can support analysis of areas which are not traditionally financial in nature, but areas where a good business person can assist:
1. Is your management team strong? What areas need to be strengthened and how best can that be accomplished?
2. Are there different/better distribution channels which would enable the company to grow in the short term?
3. Identify competitors and try to compare your company's performance to the competitors.
For a business owner, in today's business environment, being prepared to react to growth opportunities is as critical as ever. Having a capable advisor to help you recognize and be prepared to take advantage of those opportunities is just one key to your success. Good, strong CFOs can help you be defensive when you need to be, and are a critical component for success when you go on the offensive.
Nperspective's team has a proven track record of helping entrepreneurial companies succeed. Contact any of our CFO partners for additional information.
We can provide a free consultation to discuss ways we can help your company focus upon growth opportunities as the economy recovers.
Please contact Janet Watson at (813) 317-3460 or
jwatson@npcfo.com
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