Why our business doesn't have enough money?

Cosmin Cricleviți

There are many situations in which companies have capital problems from the perspective of recurring and occasional expenses that will appear in the next period. The existing amounts in the accounts and those to be collected not being sufficient to be distributed to the needs so that they are properly covered.

If this situation, as we suggested above, is not created by payment delays from customers, there are several other potential recurring reasons that should be known in detail in order to be recognized as such and addressed accordingly:

Process efficiency

The way it is built and especially how it plays out in reality. An ineffective process consumes, every time, more resources than necessary, generating losses or wasting resources, materials, energy, thus artificially reducing the company's profitability. It should be noted that these losses and waste are often hidden in the prerogative of activities that generate added value and cannot be identified easily.

Profit margin too small

The difference between revenue per unit of value added and cost per unit of value added is small or non-existent. If we don't have a situation where we've reduced prices a lot to become more competitive with the competition and we're selling at market price, we're obviously facing a spending problem. Either they were budgeted incorrectly, or they are not closely monitored and therefore not controlled, and this fact causes them to fluctuate without, in fact, having a connection with the real need expressed by the costs.

Too small volumes of products/services or customers

When we talk about activities that involve relatively stable expenses and capacity, for example a restaurant, a fitness room, a medical clinic, a cinema hall, etc. profit is obtained only when the volume of customers served is greater than a certain point (eg: 40% of capacity), point up to which revenues cover expenses (break-even). Even after this point, profitability may be insignificant or low when expenses are not consistently and consistently controlled.

Missing the target revenue volume

In any company it is desirable to have minimum revenue objectives as well as target objectives that allow the entrepreneur to achieve an anticipated and desired profit. If these revenue targets are not met and there are excess expenses (assumed) to generate the opportunity to reach the respective revenue targets, it is normal for profitability to be compromised.

Exceeding the maximum spending target

When we have an operating budget established in such a way that once the income targets are reached profitability will also be reached, we can say that the expenses have been budgeted accordingly, respecting the budgetary discipline guaranteeing the achievement of the profit objective. But real economic life teaches us that plans are indicative and, not infrequently, situations arise that force us not to follow the previously established financial management plan. In these moments it is extremely important to recognize the budgetary slippage and to identify, immediately, stabilization and recovery solutions.

Miscalculated return

This aspect presupposes, most of the time, the lack of analysis of the yield obtained for the amounts rolled. For this reason, the data representing the nominal or the percentage profit are not sufficient to be able to see all the perspectives of the financial performance; in order to adopt the most educated and inspired strategic decisions within the business, it is important to take several indicators into account.

All the scenarios presented above can be controlled when we have a properly constructed budget and tools capable of showing us the degree of accuracy in terms of budget execution.

Thus, the first point where we can measure the operational performance of the company, and we can do it even in real time, is at the end of the operational process and the financial-operational performance (almost similar to the EBITDA indicator from conventional financial management) shows us how capable the company is to generate profit and consequently control costs to maximize that profit. If at this point the numbers do not look good, it is an illusion to have profit expectations at the end of the fiscal year.

As we said above, at this point of the company's activity, the actual financial performance can be identified and this will facilitate correct, quick and efficient decisions; when the measurement, through Adaptive Financial Management, is done in real time, not only at the end of the month or even towards the end of the next month, when the accounting statements are submitted, the probability of anticipating major budget decreases or imbalances is maximized and the leverage we can generate profit being much more accurate and generous.

AMF (Adaptive Management Financial) is a software built, from the ground up, to facilitate the tracking of all operational financial parameters, thus offering each manager, in real time, the necessary information, correctly structured, to be able to decide and act promptly.

It is gratifying to see so many entrepreneurs who start a business out of a passion or an inspired idea and after a while (months or a few years) end up selling their business or closing it down because the financial result is not brings it closer to the anticipated one or risks disaster, despite the valid idea of entrepreneurial business.

The Adaptive Management Digital team created applications such as Adaptive Management Financial and Adaptive Management Tool to provide Romanian entrepreneurs with useful, valid and robust tools that will allow them to identify and avoid losses as quickly as possible and, at the same time, to orient themselves coherent and sustainable towards profit.