by Rob Joseph, Director, BeaconCFO Plus
Ask any entrepreneur or owner of a growing small business whether they are more concerned about tomorrow or two years from now, and most will immediately answer, “Tomorrow.” It’s easy to understand why. Running your business day to day takes all your energy, focus, worry, and time. And many decisions are driven by immediate cash-flow needs.
So it is a natural and necessary tendency of small business owners to deal with the emergency of the moment. And as soon as one urgency is dealt with, another one is right on its heels, and then another, and still another after that.
Now it’s all very well to say we need to be proactive and not reactive, but sometimes you just have to deal with the crisis of the moment, no doubt about it.
The problem is this short-term approach can be detrimental to your business. It is insufficient to sustain decision-making based on driving short-term cash flow. Long-term strategy decisions are also crucial to ensure your future.
Three years ago, Jamie Dimon and Warren Buffet published an op-ed in the Wall Street Journal that cautioned companies about the dangers of short-term thinking related to quarterly earnings statements. “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth, and sustainability,” they said.
It’s a well-known management issue for giant, publicly traded companies. But short-term thinking is just as much of a problem for small businesses as well.
For example, it can be tempting to solve a short-term cash flow shortage with borrowing or the sale of equity at unfavorable terms. An owner may rationalize, “If I don’t plug this cash-flow leak right now, there won’t be a future to worry about.”
Consider this: A couple that we know sold 45 percent of their company to a private equity firm for a seven-figure sum that at the time they thought was a generous deal. In hindsight, they now realize they sold too much of their company for too little. Now they have some near-majority owners on their board creating conflict that they would really rather not have. They plugged a cash-flow leak but at a cost that turned out to be too high.
So what is the answer? Small businesses must be concerned with the short term but not at the expense of the future. We CFOs can provide insight—not unlike a second opinion to a medical diagnosis—to prevent letting the urgency of the moment lead to a longer-term regret.
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