So many times business owners battle within themselves and with each other about the demands on the cash. Owner A wants to add new equipment or add on to the facility, yet Owner B needs to take a sizable distribution to pay for personal issues or other debt requirements. Then the discussion begins about ownership transition and succession planning. Erg!! I call this the ‘Cash tug-of-war.’ Is there a solution to this age-old conundrum?
Many times this discussion ends with partners storming out and going their separate ways, the decision is a non-decision that keeps with the status quo. However, emotions and frustrations increase under the surface. Employees feel they are on eggshells with indecision making all the decisions. There is only one rope in this tug-of-war because there is only so much cash to meet all of these demands, hopes, and dreams.
Dangers of “balance budgeting”
Balance budgeting is a term I use for the act of making purchasing and transition decisions based on the cash balance at the bank at this moment. Or, what you think the balance will be when you get that big payment. This is the root of your cash tug of war. “Wait what? How can we make decisions without knowing what is in our account?” you ask.
What to do about the Cash Tug-of-War
1. Define priorities
At the risk of this sounding too easy or too difficult, it is vitally important that you and your team define the priorities in the coming months and years. This process starts at the ownership level. Each member needs to air out their goals and priorities when emotions are low. Ownership also needs to discuss the priorities of the business so that the owners’ goals can be accomplished. These priorities are passed down to the management team so that they can formulate and strategize on the best plan of action to achieve these priorities. Usually, us consultants, call this strategic planning. But you are simply creating an action plan to execute the goals of company. Part of this action plan is deciding on when and on how much cash will be needed to execute this plan. Knowing the priorities, management and ownership know how to make day-to-day decisions regarding cash without a big argument each time an issue arises.
2. Bite-sized pieces
Credit card companies do not get rich off huge payments, but instead they profit from 2% of every transaction. How can you put away the cash you need for expansion or transition? Bite-size pieces. Alternative lending companies are now taking small daily payments for repayment from small businesses. They understand the demands on the small business’ cash and don’t want their debtors to feel the weight of the huge monthly payment staring them down. This is the same concept on how to make lasting change in your organization. At my house, we use our reward cash from credit cards as our vacation savings. It happens automatically and then I don’t have to feel guilty or that taking a vacation is out of our food budget. Success!
3. Forecast cash
Forecast? “I don’t have a crystal ball, lady,” you exclaim. By now, however, you have identified what your priorities are and how much to spend each week towards those priorities. So all there is left to do is merge these dollar values attached to priorities with your sales projections. You are right, there is no science. It is more art. But the more you track these numbers, the better you will get at the craft.
Decisions now
Educated decisions can now be made. Whew. No more speculation and balance budgeting needed. Ownership and management alike fell like progress is being made toward the end that matters to them. You just gained yourself months in foresight and a plan for your cash needs in the process.