Negative Finance & Operations Process Cycles

Negative Operational Cycle

When a company has a negative financial and operational process cycle, it starts with inefficient operational processes and poor financial visibility. The company might even think it is doing great financially because revenue is high. But, poor operational efficiencies often ask too much of its employees and cause it to spend too much to get that revenue. So the company’s managers see a cash balance that is lower than they expected and think, “we need to grow so we can make more money!” Unfortunately, this is the last thing you want to do when you’re at this stage as a business. If a part of your model breaks early, adding revenue will only make it more challenging to solve. Those issues get worse, which makes your margins worse, and leads to managers demanding even more growth!

Meanwhile, your employees get stuck in the middle. The uncertainty around why they are asked to do more when they are already working hard creates stress. Also, they realize that there are operational issues. They don’t know what to do about them, or they do know what to do about them, and no one is listening to them. This cycle creates fear because they know that adding more into this broken system will create more problems than it solves. They start to worry if the company they are working for has a plan to fix its problems. Then they begin to worry about their job security if the issues continue. They may even be scared to say something because their manager is so insistent that more of everything is the answer to their problems.

Positive Financial & Operational Process Cycles

Positive Operational Cycle
Positive Operational Cycle

Luckily, the opposite is also true! As operations improve, so do margins! The more you understand and have visibility into your expenses and finances, the more you can target operational process improvements!

Once you get on the positive financial and operational cycle, you can then decide whether or not you want to grow and how fast. If you don’t want to grow, you can continue to focus on operational improvements that help improve your cash flow and make your employee’s lives better.

If you do want to grow, you need to choose how big and how fast. But most importantly, why you chose that answer. You may want to grow slowly so that you can build the impact you have on your community through engagement and new jobs. Or you can decide to take on the world and grow as fast as possible to expand that positive impact as far as you can. Both are great ways to approach your business and have different implications for where to look for funding.

If you want to grow slowly, you should plan on growing your business using your profits. That means using your current cash flow to invest in what your business needs to grow or getting a bank loan to finance what your business needs to grow. Note, both ways use your profits to grow your business. When you take a loan, you are using your future profits to finance your growth because you are promising to pay back the loan using those future profits.

If you want to grow quickly, then you need to take on outside financing. If you plan on getting extremely large, then you can look at venture capital groups to provide the funding you need. If you want to grow big, but not extremely large, then you would look towards mezzanine and growth private equity groups. Most of these groups would be looking for an equity position in your company in exchange for the risk they are taking.

Either way, you will need to add increased discipline to your operational performance. If you are going to use either current profits or a loan to finance your growth, you need to watch those profits closely to make sure you don’t overextend yourself. If you are trying to grow large, operational efficiency is critical to get to the size you want and to deliver the returns your investors will eventually require.

How do I break a negative operational process cycle?

You need to address both your financial transparency issues and your operational process efficiency issues head-on. Develop financial reports that allow you to make decisions and identify problems. At the same time, talk to your employees! They will know what issues exist in your company. As the owner or manager, you will understand at best 80% of what is happening at your company. Ask direct questions to your employees about what they see every day. You can also hire an outside group to facilitate your financial development and in engaging your employees. They should also help structure what comes out of both processes and turn them into actionable insights and real results for your company.

I’m in the positive cycle; how do I know which path to go down?

The decision on which growth path to go on is one of the most important you can make. It is often helpful to hire someone to come in and help you through that process. You can often waste time and opportunity by not understanding which path you are on and what that means in terms of financing options. If you do bring someone in, make sure that they listen to you. Many groups have a predetermined idea coming into an engagement and funnel you in that direction. They should work with you to make sure you know where you are, where you want to go, and the best way to get there.

How does all of this affect my employees?

It is also essential to keep the impact on your employees at the center of these decisions. If you are trying to fix a negative cycle, employees can feel like the scapegoat for problems they don’t have control over. Or, if you decide to go for growth, employees can start to feel uncertain about their roles and how they fit into the organization. Make sure to engage your employees on any path you take, because they are the ones who will help you succeed or fail.

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