Do you know how to boil a frog? Seems like a silly question, but the answer in illuminating. If you boil a pot of water, then throw a live frog into the water, the frog will jump out. Although a bit scalded he’ll live to jump another day.
But if you want to boil the frog alive, start with cold water, and slowly turn the water temperature up. Guess what will happen; the frog will adapt, and eventually be boiled. He’ll adapt to the small changes until it’s too late.
Our businesses are the same way. We see and react quickly to big changes but if we don’t watch the small things, we adapt to the changes … until it is too late. It’s like the game of Chess; by the time you realize you are in trouble, it’s checkmate.
The three things that will kill your business quicker than anything else, what I call the “Three Deadly Sins of Business,” are too much inventory, too many people, too much accounts receivable.
Inventory is our cash investment that is sitting idle waiting to be used. It doesn’t matter how the accountant measures the inventory, it still is cash out of pocket. Once invested you can only get your money out by selling and producing product. When it grows and isn’t being sold we’re using cash unproductively. It is deadly when unchecked.
Secondly, I keep on top of how many people I employ. People are almost always one of your biggest costs. I won’t hire anyone new until I have a clear line of sight on how to monetize the hire. Having too many people is like a bleeding artery; you’ll be dead soon if it isn’t fixed.
Receivables represent work we’ve done (and money paid out) for which we are not yet paid. When we carry receivables we’ve become a bank for our customers. Some businesses require you to hold a receivable, especially business to business. Just like too many people or too much inventory, too many receivables drain you of cash.
Whatever metrics you choose, keep them simple. Be sure that your metric is as close to a direct measure of the critical activities as possible.
Need help building your metrics? Give me a call – it’s what I do.
Dan Yount, Partner
Certified Business Transition Expert™
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NOTICE: B2B CFO Partners, LLC, dba B2B CFO® is an Arizona limited liability company that provides advisory and consulting services. B2B CFO® partners are independent contractors and are not officers, employees or agents of, or partners or joint venturers with, the companies they serve, nor are they Independent CPAs.