Want to Differentiate Your Business? Start With Finance Fundamentals
The key to sustainably pursuing innovation is having a handle on where you stand financially.
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The idea and allure of innovation, including the buzzword disruptive, is important for business and large and small, but can be a make or break issue for small business. Carving out a niche in your market, outpacing the competition, and focusing on how to deliver value to your customers requires that you and your business continuously evolve. A fact that can often be overlooked, however, is the importance of finances and financial resources to sustaining innovation over the long-term.
Finance and the financial position of your business might not sound like they have anything to do with innovation, but if we drill deeper some connections become apparent. In order to pivot your business, develop new products, expand your service offerings, and continue to compete in a rapidly changing landscape you need financial resources.
Innovation, and rolling out new products or services may get most of the limelight, but finance fundamentals are what allow you and your business to develop these new ideas.
Let's take a look at a few specific areas where your finance fundamentals can help, or hurt, you as you try to drive innovation:
1. Cash is still king.
Net income is a financial metric that receives a lot of attention, but you and I both know that cash flow is what pays the bills, buys supplies, and keeps your business going. Tracking your cash inflows and outflows, which is now possible in real-time using either desktop or mobile-first applications, is absolutely critical.
Keeping your finger on the cash pulse of your business can help you decided just how much you can afford to divert to your new ideas. Accounts receivables are nice assets (more below), but they are not cash -- just promises to pay you later.
2. Know what you can leverage.
The balance sheet is something that every entrepreneur knows is important, but can be relegated to the back burner in some instances. Not knowing where you stand, in terms of your business assets and liabilities (debt) can trip you up if you try to launch new ideas.
Remember, that when you attempting to increase your credit line, obtain a new loan, or seek some alternative form of financing, your business (and perhaps yourself) are viewed as a package. It doesn't matter how good your idea may be, if you already have high debt levels you are going to find it difficult to finance your expansion idea.
3. Set up an innovation account.
Just like you are able to redirect certain dollars or percentages of a direct deposit to different accounts, you can do the same with the funds you want earmarked for innovation. Instead of, for example, having to take out a loan or bet the proverbial ranch on a new idea, you can gradually build up capital that you can afford to dedicate to new product ideas.
This will not always be possible for every business, but it's worth at least thinking about as an alternative to borrowing funds to help innovate and drive growth.
4. Stress test your finances.
The small business landscape is littered with small businesses that over-expanded, opened one location too many, or didn't track how individual initiatives were performing -- don't let that happen to your business. Putting down on paper, and documenting just how bad certain things can go is not an easy task, especially when you are in a growth oriented mindset.
That said, taking this step, analyzing what might happen if everything goes according to plan, or if things go poorly, will provide you with relevant and important information. For example, a good problem might be increased sales, but can you re-order inventory and pay your suppliers quickly enough to meet the increased demand?
5. Growth doesn't always equal profits.
Innovation is a trendy and hot topic, and that can be said without a doubt, but innovation ideas do not always lead immediately to supercharged profits. Linking back to some of the points above, increased sales and business growth also can come with increased costs and levels of stress on your business finances.
If you aren't careful, and don't really drill into your cost structure, both current and projected based on your innovation plans, you may end up a new product or service that actually hurts your bottom line.
Innovation and finance fundamentals might not seem like two topics or ideas that go hand in hand, but really are quite closely connected. Drilling down, understanding your finances, and linking together your plans with your bottom line will put you in a better position so innovate, grow, and succeed.