Integrating Mindful Money Management With Small-Business Strategy

James Langabeer PhD, Vice Chair at UTHealth, and founder of Yellowstone Consulting, LLP, advises on financial and strategic decision-making.

Many of us want to become wealthy, but unfortunately, only a small percentage of us will end up breaking $1 million. This is especially true if you do not change how you think about money and its meaning in your life.

If you run a small business enterprise (SBE), you can’t count on someone else to provide you with consistent paychecks; it’s up to you to decide how much to reinvest in the business and what to pay yourself now versus in the future. If less than 50% of all small businesses survive for the first five years, and most of their wealth is tied up in non-financial assets, as the U.S. Small Business Administration reports, then that would imply that most owners are destroying, not building, wealth. How do we turn this around?

Obviously, one very important factor in your company’s success is the business strategy and positioning of your products and services. Business strategy represents the pattern of intentional decisions you routinely make. These include things such as which services to offer, what locations to serve and the market segments to focus on.

Differentiation, pricing strategy and effective marketing are all important. But on top of that, you have to improve your money management. Most SBEs lack a clear vision of how to improve their financial processes. When nearly 60% of your company’s equity is tied up, you have to know what to do with your free cash, how to optimize inventory levels and how to incorporate financial best practices.

A number of firms just hand over their books to accountants and hope for the best. Here’s where most small-business owners fail. You might know your yoga studio well, or how to do great plumbing or even make great clothing, but if you lack effective money management skills your business is likely doomed.

We have to become mindful entrepreneurs and small-business owners. To be mindful is to be aware or conscious of what is happening. It isn’t a passive approach, but a disciplined insight into your behaviors and actions as they relate to money and finance.

In the course of starting and leading multiple new ventures, I have found that a mindful combination of these five recommendations can help ensure success.

1. Optimize your supply chain. It’s really important to understand the link between the supply chain and your financial performance. You can’t just increase your prices each time your supply costs go up. I worked with a general contractor who used to purchase material for every home as needed. So, he would spend roughly an hour or two driving to his specific contractor location to pick up materials each day.

With a little work, we found that 70% of all of his supplies were fairly standard; this knowledge allowed him to limit his opportunity cost and predict his inventory needs. He was able to reduce his time spent on this task, and he could then spend more time selling or doing real work. Remember, inventory and customer service rates represent a trade-off. Higher inventories equal higher service levels but possibly increased holding costs. You have to manage these optimally.

2. Improve vendor management. You might be surprised to know that properly managing and improving relations with vendors is critical to your financial success. Think about the U.S. Postal Service’s relationship with Amazon. Obviously, there can be a lot of tension, but overall, they are interdependent. You have to recognize the value that a good vendor can bring you, and they need to recognize the value you bring them. Discounts, and even premiums, work well to incentivize vendors for better performance. Low cost is not always the best approach to vendor relationships. Look for the best service, performance and communications.

3. Benchmark key financial metrics. Sometimes we get an invoice, and we pay it right away. This is good for the vendor, but not always good for your finances. You need to align your own payment schedules (to employees, vendors) with your receivables. As part of this, you should have a financial scorecard that shows you some of the most important metrics and how you are doing overall. These include days sales outstanding (DSO), operating margin and days cash on hand (DCH).

4. Manage your free cash flow. There are times when you want to simply save this money and let it accumulate in a business checking account. But remember, you will earn basically zero interest on this money. If you took a slightly more aggressive investment policy, you could retain a certain number of days of cash flow needed (say three or seven days) and then invest any reserve over that amount into an index mutual fund or balanced fund. Instead of earning 0.1% annually, you might earn 5%-15%, which can help fuel growth in a small business. Another thing to consider is your mean (or average) error in your forecasted revenues and actuals. You’ll need to develop better systems of forecasting revenues and expenses to improve your free cash flow and performance.

5. Create optimal allocations. Develop a mindful mix or allocation between what you need to retain in the business and what you can extract. A lot of owners like to keep all of their equity in the business, while some take most of it in compensation and leave little in owners’ equity. Consider a more balanced approach based on your company life cycle. If you are in the early stages of growth, you need to take only a little out and maintain the equity. If you are a much more mature business, consider higher payouts for immediate and deferred compensation as well as retirement.

Financial and business strategy are highly interrelated. Taking a mindful approach to your finances can help to ensure success and future wealth. Use a scorecard to manage all three of your financial statements (cash flow, P&L and balance sheet), and get help from a financial advisor to make a more strategic and thoughtful approach to your finances.


Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


https://www.forbes.com/sites/forbesbusinesscouncil/2021/12/22/integrating-mindful-money-management-with-small-business-strategy/

Previous post New York’s Battered Economy Could Struggle for Years to Come
Next post The strategy behind sonic logos, like Netflix’s startup chime