Managing A Mature Business – Managing Cash Flow

This is the first in our series of blog posts about Managing A Mature Business.

In case you missed it, we completed a set of 7 posts about Starting A Small Business, from making sure you know your Purpose to how to start up, to preparing a feasibility check, planning and hiring your first employee, and you can catch up by going to teikoh.com. We have also just completed another 7 part series on Growing Your Business from learning about Key Performance Indicators for your growing business to marketing, working with employees and making sure you have the systems to scale. You can also look for it on our website at teikoh.com.

In a business, at any stage of its life, cash flow is an extremely important part of that business’ lifeline and will always need to be managed.

However, in a mature business, the cash flow pattern is more challenging. The business is no longer growing, in some cases it is stagnant and while you may have reduced investment needs, the cash that is generated through a mature and stagnant level of sales may not be replenishing the “catching up” of cash outflows that you were experiencing before.

There are four stages of a business cycle, being startup, growth, maturity, and potentially decline.

In the startup stage, sales are low in volume but grow quickly. In the growth stage, sales are beyond the break-even point and both sales and profits are increasing. In the mature stage, the rate of growth slows down and cash flows become relatively stagnant.

If you are not managing your cash in maturity, in order to invest in innovation and new products and services to kick off the next growth phase, you may enter the decline phase where all sales, profit and cash flow decline until you exit the business.

In each of the stages of the business cycle, the pattern of cash flow is characteristic of each phase.

During startup, while sales may be small in volume and you may not yet be making profits, cash flow is strong and as you become successful in your new business, you should be generating cash to fund capital investment that’s required to fuel further growth.

As you grow, and start to mature, cash flow starts to slow, and you generate enough cash but is becoming stagnant and debt may now be required for additional funding.

In maturity, before you start into decline – or in need of a refresh so that you kick off the next phase of growth – cash flow generation is slow and you may need to sell older assets to fund new purchases and to cover any debt.

Maturity is not the time to relax!

As a business, unless you wish to exit, you need to look to innovate with new products, services and processes to reinvigorate your market. In order to extend the life of your business, you need to find other opportunities so that your business experiences another stage of growth, a mini- startup again.

You will be larger now, so that means more employees, more expenses than when you were growing, in a market where there are likely to be more competitors.

In managing the slowing cash flow you can employ two major strategies.

First, while cash flow is still positive, even if slower, you can choose to fund capital investment in new opportunities from cash flow rather than increased debt, while repaying debt as much as you can. This means potentially slowing down the rate of your own rewards now, for the sake of the future of your business.

Second, as cash flow slows and new capital investment is probably less likely to be required, you can avoid new debt by bringing in new partners or investors, and you can identify any unnecessary or expensive assets and sell them to use the cash generated to retire debt and replace with more efficient assets.

These are holding strategies, until you decide to either restart a new growth phase with new markets, products and services, recapitalise with new partners, or plan to exit and sell or close.

In the meantime, there are active tactics you can employ.

You need to monitor your cash flow closely.

In all this time in business, this more than any other time is when you need to work closely with your accountant to watch your cash flow regularly. Pay attention to key metrics. In some businesses, these may be simply sales, in others more complex metrics may affect your cash flow such as debtor turns and stock turns. You need to understand what speeds up cash flow, its relation to sales and profits, and the speed at which it can change.

You should be monitoring and analysing cash flow forecasts at least every 30 days, and preparing a continually updating forecast at least 12 months into the future.

Prepare cash flow statements as well as the usual profit and loss and balance sheet reports.

Work closely with your accountant to do this at least on a monthly basis, if not at call when required.

At this critical stage of your business, these reports, including a reliable cash flow statement explaining your cash flow resulting from your profit and loss and balance sheet changes, is a must. The reports must be capable of explaining why certain financial consequences are being seen and giving you ideas about what to do.

This means that you need to make projections frequently.

A cash flow projection at this stage of the business is not a set-and-forget exercise.

You need to prepare your budgets for at least the year ahead at the end of every financial year. You then need to translate this into a cash flow forecast for that year, based on what you know about how cash behaves as a response to your budget if you achieve your budget.

You then need to monitor actual performance as already discussed above, and depending on results make any changes necessary.

As a result of these decisions, you need to update the remainder of the projection on a rolling basis every month.

Doing this should help you to identify issues early.

As you continually update your projections forward you should be able to recognize, and even isolate the times when cash flow stress is likely to occur. This will allow you to come up with options early and make your decisions based on real-time performance.

Identified early enough, your options can remain open – whether to indeed go to the bank or if early enough identify asset sales or find new investment.

Should a cash flow crisis occur without your foreseeing it, your options at that time may be very limited.

With accurate projections, you can manage your cash flow.

As a matter of course, manage the timing of your payments as much as possible and control, as much as you can, through disciplined debtor control and active sales marketing, the timing of inbound cash receipts.

You should develop an emergency backup plan.

With your business at the mature stage, you should be making decisions about what you want to do. Do you want to extend the life of your business? Do you want to get it in the shape where you can hand it on to family members without setting them up to fail? Do you, in fact, want to sell or exit the business?

In any of these decisions, you should envisage and plan for a “worst-case scenario”.

What if the worst-case were to happen in each of these decisions?

This usually means identifying the amount and then preparing a source of reserve cash to deal with the potential emergency. Having prepared for any eventuality early enough can provide powerful peace of mind because there are no surprises.

In maturity, plan on allocating limited cash in your projections.

You can do this by considering the interest rate of borrowings and negotiating better rates, implementing late payment penalties for customers (and avoiding any imposed on you), checking any business covenants on loans and debt agreements to make sure you don’t trigger a default and trigger a right to demand immediate repayment.

Your plan should aim to avoid the worst scenarios first, but ultimately be capable of avoiding them all as you implement your plan to reinvigorate, sell, or exit.

Maturity does not automatically mean an ending.

Let me make this very clear. Just because your business is in maturity does not automatically mean that you will go into decline and eventually have no choice but to close down the business. As intimated in the discussion above, the key is to ensure that you recognise the stage of your business and the characteristics of its effect on cash flow. This will allow you to make decisions to decide upon the future of the business, and not result in you being dragged along like a passenger.

In future blog posts, we will discuss some of those options.

You can keep innovating, and redesign a new phase of your business. Recognising that your markets and products are in decline only means that you have time to seek new products and services to put before a new or expanded market. Furniture manufacturers in a declining market of home furnishing could extend into office furniture. Civil engineers in a mature market from mining could develop into housing construction.

Where can your experience and expertise take you to find new markets?

Don’t miss our continuing series on how to manage your mature business, possibly right on to succession planning or selling. Make sure you keep up with the series by putting your name down to get them sent directly to your inbox – don’t miss a beat!

See you soon!