The reason there is such a need for small business financial help is because of the inherent realities that come along with the small business marketplace. Small business volatility has been discussed previously, but I want to explore further what can be done to combat financial concerns. Oddly enough, you are probably sitting on excess capacity that if tapped into can bring about the financial help you are looking for.
It is common knowledge that most small businesses will fail, but the reasons why are relatively few. I have compiled a quick list of why failure may occur. Each reason listed ties back to the financials at some level. Basically if a business can’t make money it cannot survive.
Businesses fail because:
- Businesses don’t make money because they can’t full fill a need
- the need doesn’t’ exist
- the need has changed
- the need is being fulfilled elsewhere
- the market is not aware of the offer
- the competitive advantage is weak
- The need is overly demanding
- Demands a higher quality than what can be produced
- Demands a shorter lead than what can be provided
- location is a deterrent (convenience)
- Small businesses don’t make money because there is a low profit margin
- The need exists but is not such that it will support a new business
- Small market
- Competitive market (high financial barrier of entry)
- The cost of fulfilling the need is high relative to the sale price
- Small businesses don’t make money because market fluctuation = demand fluctuation = inconsistent cash flow
- Overhead costs are often fixed and constant.
The question becomes; how can you get more money out of your small business? The Theory of Constraints (TOC) boasts that a few simple changes in the way you address the organization can increase your profits by as much as 60% without spending a single cent. This is done by assessing your organization, applying the Five Focusing Steps and making the appropriate changes required to increase the company’s throughput.
TOC assumes an inherent simplicity within an organization and seeks to eliminate the core conflict that is causing the organization’s poor production. The conflicts can be policies, procedures, or assumptions that have been left unchallenged. Once identified a plan is put into place to address and eliminate the conflict in pursuit of the company’s goal to make more money now and in the future.
Companies often have a great deal of internal capacity that is not exploited. Once identified it is quite surprising to think so much capacity was left idle. The reason for this is that underlining assumptions are made which blind the people closest to the problem. Case study after case study has shown how a simple change in a paradigm or a process can yield huge monetary gains.
TOC has defined a hierarchy of three metrics to address in order to increase the bottom line. In order the metrics are;
- Inventory Investment
- Operating expense
Throughput (T) is “The rate at which the system generates income”. Expressed as an equation Throughput would read: ( (Sales Price-Truly Variable Cost)/Time). Increasing Throughput is the first priority, and is often increased simply by identifying and exploiting the constraint of the system. Throughput of the constraint is often referred to as Octane: The income/unit of constraint for a particular product. Think about this for a second, the first priority is “the rate at which the system generates income”! Any other concerns should be subordinated to throughput.
Inventory Investment (I) is “The things we buy with the intent to sell”. Inventory is the sum total of the costs spent in buying things up until the moment someone actually pays us for them. Inventory is often expresses as Dollar-Days which is the sum total spent multiplied by the number of days held. Addressing inventory is the second priority.
Operating expense (OE) is the cost of converting “I” into “T”. All costs associated with the business lumped into one. Don’t be confused by using allocated costs. Costs may be good for reporting, but not for managing. Operating expense is the third priority and will consist of costs such as labor. That’s right, labor is an OE.
Using these metrics you will begin to identify where and how your company is either loosing or earning money. If the principles of TOC are properly implemented Throughput should increase, Inventory investment and Operating expenses will decrease. When this happens, your net profit will see a rise, your return on investment will increase, and you will also see a positive upturn in your cash flow.
Hopefully this helps you to see how the financial help you may need is under your nose, and well with reach. As a smaller firm you will need to remain agile and conform the ever changing needs of the market but understanding the above will help you to do so with a much healthier profit margin. In closing I would like to add that your current financial crisis is only a symptom, it is not the problem. The problem is inherent to smaller firms and will remain if you don’t diversify and grow. Best of luck to you all and God bless.