Some entrepreneurs have a knack for innovative business ideas, but lack the key management skills needed to get their idea off the ground and turn it into a viable reality.
The truth is that entrepreneurs will be forced to learn this skill or, alternatively, they will need to employ someone to do it. The day-to-day management of a business may not appear as exciting as the innovative concept that often underpins it. However, it is just as important.
Senior Tax Advisor at the Institute of Public Accountants, Tony Greco, told Dynamic Business that clever business owners usually anticipated cash flow problems well in advance and developed strategies to minimise damage in the event of a cash-shortage.
However, Mr Greco also said that management skills were critical in preventing cash flow problems from materialising. In particular, the management of people — including the maintenance of strong relationships with suppliers, customers and creditors — was key.
Healthy relationships can be used in tough times to, for example, negotiate an extension on a payment term with a longstanding supplier. Alternatively, it is possible to offer discounts to trusted customers if they agree to shorten their own payment terms. Such arrangements can help to build future trust.
A canny business owner will also have the ability to manage stock and resources. For example, some operations find that too much of their cash is tied up in old or slow moving stock. Stock should be regularly monitored to inform business decisions and ensure cash is not being directed into unprofitable areas.
Understanding the cash operating cycle of a business is essential to its survival. The cash operating cycle refers to the length of time it takes for purchased stock to provide a return upon its sale. Most businesses have got 45 days to pay their suppliers (if they are on good terms), so business owners should monitor how long stock sits on the shelf before it eventually converts into a sale.
“Sometimes people don’t understand basic management and basic management skills are what they lack. They could be entrepreneurial people, but you still need management skills to ensure the survival of your business,” Mr Greco said.
Anticipation was another key factor identified by Mr Greco. He suggested that business owners negotiate an overdraft facility with their bank to provide them with short-term access to funds in the event of strife.
A cash-flow forecast will often identify those periods when a business is likely to be squeezed for cash. It could be at a period when customers have historically proved to be late in their payments. It is important to negotiate such an arrangement in advance. Sometimes a major customer could miss a deadline unexpectedly and land a business in difficulty.
“Once you’re in the poo, it’s twice as hard to convince the bank to give you money,” Mr Greco said. “You can go to your bank and have overdraft facilities set up. You give them cash flow projections and you say ‘we just need some short term options if we get tight’.”
Again, negotiating such an arrangement in advance is sound management and will maintain a strong relationship with the bank. As a business owner, this is important.
If a business lacks an individual who can take on a manager type position, it is worth considering seeking professional assistance to obtain advice and guidance.