Recently, I was in an introductory meeting with a business owner as he described to me the challenges his company was encountering. I learned in that meeting that his company had many business segments for product and service offerings. Recent declines in overall business performance had him perplexed. During the discussion he made this statement; “I want to be sure good money is not chasing bad”. Many of you have probably heard this statement in some fashion but as we talked it was clear that in his situation he meant he had a precious resource, cash. He wanted to be sure that cash was being invested into those areas of the business that would produce additional cash, not into areas that would drain this precious resource.
There are three basic steps that must take place to be sure a business owner is allocating his cash resources wisely.
• Measure Accurately– Each financial segment/profit center of the business must be measured separately and accurately so the owner knows exactly if that segment is draining or producing cash.
• Determine Corrective Actions– What needs to be done to turn the draining segments into producers? Is it a sales issue? A labor efficiency issue? A manager problem? Is it correctable?
• Take Action Quickly– Don’t waste a precious resource like cash by continually trying to turn a loser into a winner with no results. Set a deadline for the drainers and if no progress, cut the losses and allocate the precious cash resources to high profit areas of the business.
Webster’s on-line dictionary has this definition of precious, “highly esteemed or cherished”. A company owner should cherish cash and allocate it wisely by measuring accurately, determining corrective action, and acting quickly.