If you’ve ever exercised by lifting weights, you know that the amount of the weight on the bar is only one variable that needs to be considered for a particular exercise.
If you’re doing a bench press, you can add more weight because your chest and shoulder muscles help your arms to lift the weight.
But if you put 50% of that total weight on each of two dumbbells, you can’t lift either one. You’ve probably also learned that you can’t use the same weight for curls as you do for bench presses.
How much weight can you really lift?
“Make everything as simple as possible, but not simpler.” ~ Albert Einstein
Likewise, if you’re going to do only one repetition, you can handle more weight than if you’re going to lift it ten times. If you are lying flat, you can do more than if you’re lying on an angled bench.
And if you’re going to do more than one set, you’ll probably have to reduce the weight further so you’ll still be able lift it when you’re in the third set.
Are you trying to build strength or develop endurance? Are you trying to lose weight or improve your golf game?
All of these variables make a difference.
How do we balance all of the financial variables?
Please note that if you hover your mouse over a defined term that is underlined with a dotted line, the definition will appear alongside. A complete Glossary is also available.
Now, consider this list of variables.
ROI (Return on Investment)
You’ve probably encountered some of these forces at one time or another. You may have discovered that they are closely linked, so that as some of them change, others change even more dramatically.
Maybe you don’t have the time or expertise to understand or evaluate all of this in a comprehensive way. Yet, these critical variables demand your attention because they will trip you up every time, and usually at the wrong time … when you’re running out of cash, the buyer doesn’t think your company is worth much, your banker wants to call your loan. That’s when the dumbbells start to get a little too heavy.
Yes, you CAN learn these business finance principles
These issues are the ones that usually come up in the most important decisions that a company must make. Should we borrow more money to fuel the growth opportunities in front of us … or, do we increase the cash we pay to our shareholders? Is it worth giving up some equity to outside investors to achieve our accelerated growth plan … or is the dilution too damaging to our existing investors?
How do I measure and evaluate all of that? Conversely, how fast can I grow my business without outside capital? For family businesses, it’s a classic conundrum: How do I fund the transition of retiring family members when the business needs that capital to grow?
How do I start to evaluate these issues?
There are a lot of perspectives from which to consider these challenges. Your company’s “Strategery” is part of that process as you seek to prioritize the Company’s opportunities to make the most powerful strategic choices to drive future performance. Being clear about your goals and objectives and what you need to accomplish is the centerpiece upon which the evaluation of these issues must rest.
Allocating your limited resources is one of the toughest decisions of all
Of course, these variables are also influential as you make your “capital allocation” decisions, a fancy term for “we don’t have enough money to go around” … so how do we decide how to allocate our limited resources?
These issues become problematic when they’re not managed, and always surface when a company does not prepare a longer-term forecast that allows it to anticipate trends and future results. Many companies ignore this process, usually with a statement that sounds something like “I don’t know what’s going to happen tomorrow, much less next year, so why should I bother trying to forecast the future”?
Ignore Forecasting at your peril
It’s certain that forecasting future results is more art than science, but it’s also true that we can do a lot to “get in the ballpark” of future expectations. Even if you’re going to “SWAG’ an estimate of future sales, you can evaluate the sales cycle, inventory turns, collection periods and other metrics to better understand the range of likely outcomes. If you’re off by even 10-20%, you can still get a pretty good idea of the general direction of the discretionary cash flows available to meet some of your goals.
Cash flow is the lifeblood of business and you’ll have the opportunity to become a Cash Flow Knight if you stick with us.
We’re going to make this as simple as possible
What these issues have in common with weight lifting is as simple as it is complex. While the iterative nature of the weight lifting routines is pretty obvious – there are a lot of variables that affect each other, and when one is changed, it changes the other – the failure to embrace those differences can lead to serious and permanent injury.
We’ve started a video finance library that will also help you understand these critical issues. You might start with our Follow the Money video primer that will give you a simple but solid overview of cash flow in about 6 minutes or so.
You can’t ignore how these issues interact
It’s clear that when companies fail to consider the interaction of variables like growth rates, leverage, dilution and valuation, unseen currents of conflict gain strength. The longer these issues linger, the more expensive and difficult they are to resolve.
Let’s get started together
In our Business Finance series for Non-Finance Executives, we’re going to explore these concepts, their relationship to each other and the impact they have on your business. These are some of the most important concepts you need to understand. We’re going to build a comprehensive framework that will help you think about them … act on them … and literally save your business.
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