Get Yoda's Wisdom

Since my earliest days as an entrepreneur I have practiced and now preach "the gospel of cash flow." Managing cash is the single most important thing an entrepreneur must learn to be successful. But many small business owners are so intent on closely managing the nickels and dimes, especially when things get a little tense, that they miss dollars rolling out their back door. Costs always have an impact - when they are expended, or not, or worse, when they are cut! Costs are interrelated. They either impact other costs or they impact revenue. You need to understand the interrelationships and their impact for every dollar you spend...or cut.

Business expenses are usually connected with revenue

Let's take as a given, that all costs (at least at the outset) have some initial basis or rationale behind them. That is, you, the entrepreneur, or somebody in your company thought about why you should or should not be spending this money. Costs also don't usually exist in a vacuum. They are, typically, connected, either to some other cost or some element of revenue. For example, spending a few extra bucks on technology (better laptops or design software) often makes developers or engineers (and therefore, their salaries and overhead) more efficient. If you scrimp on the nickels and dimes (technology) you might spend, you, often, make the dollars (developers/engineers) less effective.

When cash flow causes problems

When cash gets tight, for whatever reason, this becomes an issue. It could happen at almost any stage of a small company's growth cycle and it's where a lot of entrepreneurs get in trouble. When they were in corporate America, they remembered that when things got tough, a headcount reduction was in order, or "unimportant" functions like marketing (come on, you've all seen this one - I even dedicated an entire blog post to it recently) get slashed. So they proceed, sometimes, indiscriminately, down the same path. And, in a small company understanding the impact of cost cutting is crucial.

For example, headcount reductions in entrepreneurial operations where there isn't a lot of headcount to begin with, means less folks have to do more, and they were often doing "more" to start with. Because marketing drives sales and sales drive operating profit that provides the cash cushion needed to run a small business effectively, cutting from functions like marketing, in a small company, often has severe implications,.

How cash flow can affect morale

Finally, there are entrepreneurs out there who actually try to manage cash too tightly to the point of being "penny-wise and pound foolish." You know them. In fact, you may be one of them.

• Folks who are so proud that they never buy paper, but have their staff gather and re-use "the other side" of old reports, memos, etc. in printers, copying machines, etc.
• Others who never buy a new computer, but recycle older ones among the lower level staff or have them re-furbished older operating systems and applications programs until they are no longer supported.
• Those who don't pay for maintenance on key machines on the plant floor and they end up breaking down, usually at the worst possible time.
  
• Still others who make their few employees pay for their own coffee in the office.

Now, none of these are game-changers. In the long-run, they don't save an awful lot of money. But what they do is make they make the work atmosphere less inviting and make the employees of a small business less efficient and less effective. And that is where the bigger dollars are being spent.

Manage your cash tightly, but manage it smartly. Make sure that while you are squeezing everything out of those nickels and dimes, there aren't dollars just rolling out your back door.

The Entrepreneur's Yoda knows these things. He's been there. May success be with you!