Rock LaManna11.14.22
To grow their businesses, owners often default to external money rather than finding ways to improve the bottom line. You may be surprised that an aggressive financial strategy with better operational efficiency can fund much or all of your growth.
There are two standard options for paying for growth. You can self-fund out of the company’s cash flow or obtain funding from an external source. Familiar sources are bank debt; loans from the owner, family, or private lenders; or venture capital, where the investors take ownership or equity stake and often expect a quick and profitable return.
To fund growth internally, we train our clients to focus on multiple areas and take a disciplined approach. Strategies include maximizing cash flow, streamlining operations, increasing sales, raising prices, and freeing up working capital. Let’s start with capital.
It’s essential to get these items into the budget. We may even recommend you postpone a purchase or lease instead of purchasing.
In previous articles, we’ve discussed the importance of reviewing your Budget Comparative every month. This report shows the percentage or weight of each line item compared to both the monthly budget and the annual budget. Many owners don’t track this percentage, which puts them at a disadvantage. Comparing your actual numbers to your projections is one layer of insight. Next, we want to compare your costs to other companies like yours – called industry ratios.
Get professional input
When clients retain us for guidance on growth, we suggest they have a business valuation or financial performance review by a CPA, who specializes in growth strategies – not your tax preparer. Understanding all you can about your company’s finances will help you develop better habits and systems around money.
For example, I see owners make decisions simply to save on taxes. That’s a sucker’s game. Limiting cash flow to hide money will put you at a disadvantage. When activating your growth plan, you should look for more ways to unblock cash and keep liquidity accessible, not restrict it. Next, let’s analyze your biggest cost center: your employees.
Right-sizing. You must be honest in assessing whether your team is the right size. This means periodically making adjustments in staffing and allocation. Are your people assigned to the type of work where they can do their best? Are workers being fully and regularly utilized for the hours they are paid? An employee who works 30 hours should not be paid for full-time work – yet we often see overpayment in print manufacturing as an (expensive) employee retention method.
We also see underpayment. Many owners try to control the cost of labor by underpaying employees. We don’t recommend this approach. There are better ways to save without driving talented people away.
Analyze capacity. Monitor rush work and overtime patterns. Track seasonal work – when does it begin, and when does it end? Are you using overtime to keep from hiring needed workers? Overtime can be a strategy or a trap. On the other end of the spectrum, do you have too many salaried workers to handle your normal load? Weigh the need for extra shifts. Yes, a second shift may seem like smart utilization, but the cost of the shift must be captured in the extra work.
Maximize the day shift. You must continuously improve efficiencies in your primary shift. If necessary, add longer work days, have 4-on-3-off schedules, or split shifts to use workers more effectively. Have your prepress department start an hour earlier so jobs are approved and ready when the pressroom fires up. It takes vigilance to find bottlenecks, but allocation planning will help you use your data to support your decisions.
Your advisor can help you find ways to achieve balance without under or overstaffing. If there are staffing issues, resolve them.
Inventory sitting on your shop floor that is unsold or unused is a burden – you’ve paid for it or soon will. Until you collect the invoice from the customer, you don’t have the spending power of that cash.
You may believe you need to buy and warehouse extra materials to keep customers from going to a competitor – and that may be true. However, you can’t run your business in panic mode or based on hypothetical sales. Plan your needs in as much detail as you can.
When going through this process, we advise clients to choose reputable suppliers. Communicate proactively, and document everything.
Fulfill commitments so there’s no reason for a supplier to move you to the back of the allocation line. Research the ROI of group purchasing programs or coops to get buying power. These programs make sense for some companies. For others, it’s a losing proposition.
Make materials planning a part of your monthly analysis, and enlist your team and vendors to help you track true costs.
Proper pricing will fuel growth and give you momentum. If prices are too low, you’re missing the compound effects of using that money to grow. You will miss opportunities due to cash constriction. It’s not a one-time event; it’s cumulative. For every underpriced job you send out, you lose another chance to move your company into a better situation.
We should all use modern job tracking systems, proper estimating software, and recent data to calculate overhead. If you’re generating pricing from old data and pre-pandemic scenarios, you have no idea if you’re making or losing money.
There is no reason to be frustrated or falling behind with the sales resources and technology out there. Companies in our industry that do the best with sales use multiple channels and up-to-date, effective messaging to communicate in the marketplace.
If your personal checkbook is running the business, ask your advisor how to negotiate your business line of credit and improve your bank terms.
View it as a business decision if you decide to lend your company money. Is this a good risk? When will I get my money back, and at what rate of return? What mechanism will we use to have the proper documentation for the bank, taxes, and heirs should something happen to me?
Intermingling personal and business money is a poor financial habit that makes it difficult to see how the company is doing. You simply can’t make intelligent decisions about the business when you have an emotional stake. You are the owner, not the bank.
Always have a professional background check done when considering a partnership. Talk to vendors, customers, business connections, and so on. Not everyone who purports to have cash to invest can do so unencumbered. The last thing you need is a partner dragging you down.
Our second concern with partnerships concerns personalities. Bootstrapping entrepreneurs generally don’t like to take orders from anyone else. Can you spend your days dickering with a partner?
If you and your team agree you should sell real estate to fund growth, choose a reputable and knowledgeable commercial real estate expert who will look out for you. This person is on your growth team and working on your behalf, which means you must pay them for their time and expertise.
A caveat. There will always be people in your circles who encourage people with money and assets to make decisions – selling real estate, for example – because it benefits them, not you. Yes, this might even be a family member or trusted friend who has a hidden agenda. Research carefully when it comes to real estate and major business assets. You can’t afford to make mistakes that limit your options.
Funding growth internally takes commitment, but it’s an often-overlooked tactic in the graphic arts industry to get your business to the next level.
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.
There are two standard options for paying for growth. You can self-fund out of the company’s cash flow or obtain funding from an external source. Familiar sources are bank debt; loans from the owner, family, or private lenders; or venture capital, where the investors take ownership or equity stake and often expect a quick and profitable return.
To fund growth internally, we train our clients to focus on multiple areas and take a disciplined approach. Strategies include maximizing cash flow, streamlining operations, increasing sales, raising prices, and freeing up working capital. Let’s start with capital.
Free up working capital
Start by going over your monthly and year-to-date income statement and budget, line by line. Assess all recurring costs plus those that are occasional or once a year. When you follow this exercise, you will uncover purchasing habits and payment patterns. A nominal cost or “nuisance” expense can add up over the year.It’s essential to get these items into the budget. We may even recommend you postpone a purchase or lease instead of purchasing.
Use your budget
Proper financial management is essential to business decision-making. Using your budget to support your financial analysis is a practice we want our clients to get used to doing every month.In previous articles, we’ve discussed the importance of reviewing your Budget Comparative every month. This report shows the percentage or weight of each line item compared to both the monthly budget and the annual budget. Many owners don’t track this percentage, which puts them at a disadvantage. Comparing your actual numbers to your projections is one layer of insight. Next, we want to compare your costs to other companies like yours – called industry ratios.
Get professional input
When clients retain us for guidance on growth, we suggest they have a business valuation or financial performance review by a CPA, who specializes in growth strategies – not your tax preparer. Understanding all you can about your company’s finances will help you develop better habits and systems around money.
Think long range
We focus on solid money management habits and big-picture planning for a reason. To preserve cash flow, you can’t make shortsighted tradeoffs.For example, I see owners make decisions simply to save on taxes. That’s a sucker’s game. Limiting cash flow to hide money will put you at a disadvantage. When activating your growth plan, you should look for more ways to unblock cash and keep liquidity accessible, not restrict it. Next, let’s analyze your biggest cost center: your employees.
Weigh the cost of employees
People are an asset to your organization, but they are also a significant percentage of your budget. When topline revenue increases, labor costs usually go up as well. It’s hard to grow without incurring added hours or shifts. There are two main ways to control the cost of labor: right-sizing and managing capacity.Right-sizing. You must be honest in assessing whether your team is the right size. This means periodically making adjustments in staffing and allocation. Are your people assigned to the type of work where they can do their best? Are workers being fully and regularly utilized for the hours they are paid? An employee who works 30 hours should not be paid for full-time work – yet we often see overpayment in print manufacturing as an (expensive) employee retention method.
We also see underpayment. Many owners try to control the cost of labor by underpaying employees. We don’t recommend this approach. There are better ways to save without driving talented people away.
Analyze capacity. Monitor rush work and overtime patterns. Track seasonal work – when does it begin, and when does it end? Are you using overtime to keep from hiring needed workers? Overtime can be a strategy or a trap. On the other end of the spectrum, do you have too many salaried workers to handle your normal load? Weigh the need for extra shifts. Yes, a second shift may seem like smart utilization, but the cost of the shift must be captured in the extra work.
Maximize the day shift. You must continuously improve efficiencies in your primary shift. If necessary, add longer work days, have 4-on-3-off schedules, or split shifts to use workers more effectively. Have your prepress department start an hour earlier so jobs are approved and ready when the pressroom fires up. It takes vigilance to find bottlenecks, but allocation planning will help you use your data to support your decisions.
Your advisor can help you find ways to achieve balance without under or overstaffing. If there are staffing issues, resolve them.
Manage materials
As the experts say, “There’s the cost of materials, and there’s the hidden cost of materials.”Inventory sitting on your shop floor that is unsold or unused is a burden – you’ve paid for it or soon will. Until you collect the invoice from the customer, you don’t have the spending power of that cash.
You may believe you need to buy and warehouse extra materials to keep customers from going to a competitor – and that may be true. However, you can’t run your business in panic mode or based on hypothetical sales. Plan your needs in as much detail as you can.
Negotiate with vendors
An area owners overlook in improving cash flow is renegotiating vendor contracts. Work with your advisor to achieve savings. Be sure to get an attorney’s review on contract amendments or new agreements.When going through this process, we advise clients to choose reputable suppliers. Communicate proactively, and document everything.
Fulfill commitments so there’s no reason for a supplier to move you to the back of the allocation line. Research the ROI of group purchasing programs or coops to get buying power. These programs make sense for some companies. For others, it’s a losing proposition.
Make materials planning a part of your monthly analysis, and enlist your team and vendors to help you track true costs.
Raise prices
No one believes there’s room to raise prices one more penny. Meanwhile, your competitors are raising prices and getting them.Proper pricing will fuel growth and give you momentum. If prices are too low, you’re missing the compound effects of using that money to grow. You will miss opportunities due to cash constriction. It’s not a one-time event; it’s cumulative. For every underpriced job you send out, you lose another chance to move your company into a better situation.
We should all use modern job tracking systems, proper estimating software, and recent data to calculate overhead. If you’re generating pricing from old data and pre-pandemic scenarios, you have no idea if you’re making or losing money.
Improve selling
Next, you must improve your sales team’s effectiveness. Hire an industry-specific professional sales trainer to help you sell to today’s buyers. Old-fashioned sales tactics won’t cut it today.There is no reason to be frustrated or falling behind with the sales resources and technology out there. Companies in our industry that do the best with sales use multiple channels and up-to-date, effective messaging to communicate in the marketplace.
Rein in the personal money
If you find yourself reaching for your personal checkbook whenever there’s a cash flow issue, stop. Someday you will retire, die, or pass along an inheritance to loved ones. You can’t endanger the future.If your personal checkbook is running the business, ask your advisor how to negotiate your business line of credit and improve your bank terms.
View it as a business decision if you decide to lend your company money. Is this a good risk? When will I get my money back, and at what rate of return? What mechanism will we use to have the proper documentation for the bank, taxes, and heirs should something happen to me?
Intermingling personal and business money is a poor financial habit that makes it difficult to see how the company is doing. You simply can’t make intelligent decisions about the business when you have an emotional stake. You are the owner, not the bank.
Think twice about partnerships
If you are considering a partner to gain OPM – Other People’s Money – tread carefully. Partners often add complexity and drama during a time when you need your wits about you.Always have a professional background check done when considering a partnership. Talk to vendors, customers, business connections, and so on. Not everyone who purports to have cash to invest can do so unencumbered. The last thing you need is a partner dragging you down.
Our second concern with partnerships concerns personalities. Bootstrapping entrepreneurs generally don’t like to take orders from anyone else. Can you spend your days dickering with a partner?
Protect assets
Should you use the sale of real estate or other assets to fund growth? Good question. Meet with your advisory team, including tax attorney and wealth advisor, before selling assets of any type, either tangible or intangible. We have heard stories of owners selling equipment and leaving an ideal location to fund a risky, short-term growth initiative. Sometimes a plan like this works. Sometimes it doesn’t.If you and your team agree you should sell real estate to fund growth, choose a reputable and knowledgeable commercial real estate expert who will look out for you. This person is on your growth team and working on your behalf, which means you must pay them for their time and expertise.
A caveat. There will always be people in your circles who encourage people with money and assets to make decisions – selling real estate, for example – because it benefits them, not you. Yes, this might even be a family member or trusted friend who has a hidden agenda. Research carefully when it comes to real estate and major business assets. You can’t afford to make mistakes that limit your options.
Craft the plan
As you can see, it takes serious planning and analysis to fund growth internally through cost savings, operational efficiencies, and increased sales. You may have an initial outlay of time and cash to get on this road, so factor this into your budget and timeline.Funding growth internally takes commitment, but it’s an often-overlooked tactic in the graphic arts industry to get your business to the next level.
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.