Financially Strong Businesses - What a CFO looks for

As an SMB owner, understanding what makes a financially strong business is crucial for long-term success. As a CFO of both public and private companies, I will unpack some of the key characteristics that contribute to a robust financial foundation. In other words what makes for a financially strong business. Keeping focused on a number of key performance drivers can help you navigate your business towards a position of financial strength.

Sales and Customer Dynamics

Consistent Revenue Growth

It takes time to build a financially strong business. Critically, it requires a steady upward trajectory in sales, which fuels cash flow and enables reinvestment without creating an over dependence on external funding. Successful businesses don't just invest their operating assets, but also in growing their customer base by improving their product or services mix, offering them new solutions and becoming irreplaceable partners in the eyes of their customers.

Customer Loyalty

Nurturing a base of committed customers is akin to finding gold in your own backyard. These loyal business stakeholders not only deliver repeatable, consistent and growing revenue, but also decrease the need for expensive customer acquisition campaigns. One off customers greatly restrict a company's ability to scale and grow its operations. On the other hard, recurring customer orders provide your business a reliable, steady annuity stream of customer revenue from which to further grow and scale.

Business Model Resilience

Diversified Income Streams

Rarely is a financially strong business solely reliant upon one service or product. A business with multiple revenue sources is better positioned to weather economic uncertainty and mitigate risks of an internal and external nature.

Market Position

Your business must aim to be a price maker rather than a price taker. The ability to set prices in your market gives you the flexibility to adapt to rising costs and improve margins. Otherwise, your company could be subjected to a price cutting war - the classic race to the bottom.

Financial Health Indicators

Positive Operating Cash Flow

While financial statements can sometimes be manipulated, strong positive operating cash flows are a clear sign that your business is generating real value from its core operations. Revenue and accounts receivable can be engineered under the auspices of accrual-based accounting. However a company's operational cashflow is a more tangible metric of business performance. It measures your company's ability to generate cash from operations, which is extremely meaningful and pertinent.

Efficient Inventory Management

If your business deals with inventory, the ability to turn over its stock rapidly is crucial. It not only frees up capital, but it also demonstrates market demand for your products. A financially strong company should enjoy minimal stock obsolescence, which will reflect an efficient and optimally run business. Strong market demand for your company's products should mitigate stock obsolescence and ensure future sales growth.

Operational Efficiency

Supplier Relationships

Financially strong companies cultivate strong, long-term relationships with a select few key suppliers. This approach often leads to better terms and more reliable service, which can materially improve cashflow and enhance gross margins.

Accounts Payable Management

A cornerstone of financial strength is the ability of a company to consistently pay its bills on time. Fluctuating accounts payable balances can be a red flag for cash flow issues. Furthermore, it raises a question mark to key suppliers, on the future viability of your company and operations.

Strategic Positioning

High Barriers to Entry

Operating in a market with significant barriers to entry helps protect your business from new competitors, maintaining your market position and profitability. In all likelihood, higher barriers ensure your business is a price maker and not a price taker with your customers.

Executing and Achieving a Financially Strong Business

Building on the strategies discussed above for achieving financial strength in your business, here are some suggestions to realise enhance financial strength for your company.

Implement a Robust Financial Reporting System

Invest in a comprehensive financial reporting system, which delivers real-time insights into your business's performance. This will allow you to:

• Monitor key performance indicators (KPIs) specific to your industry;

• Identify trends and patterns in your financial data; and

• Make data-driven decisions quickly and confidently

Develop a Risk Management Strategy

Create a thorough risk management plan to protect your business from potential financial setbacks:

• Identify and assess potential risks to your business;

• Brainstorm contingency plans for various scenarios;

• Consider purchasing appropriate insurance coverage to prevent financial losses

Focus on Customer Retention

While acquiring new customers is always important, retaining existing ones can be more cost-effective and contribute to financial stability:

• Adopt a customer loyalty program;

• Frequently seek feedback from customers and act on it;

• Deliver exceptional customer service to nurture long-term relationships

Optimise Your Pricing Strategy

Regularly review and adjust your pricing strategy to ensure it aligns with market conditions and your financial goals:

• Undertake market research to understand competitive pricing;

• Consider value-based pricing for premium products or services;

• Introduce dynamic pricing strategies where appropriate

Invest in Employee Development

Your company's people are its most crucial asset in achieving financial strength:

• Provide training and development opportunities to improve productivity;

• Implement performance-based incentives to motivate employees;

• Foster a culture of financial awareness throughout the organisation

Explore Strategic Partnerships

Developing strategic partnerships can open up new avenues for growth and financial stability:

• Look for complementary businesses to collaborate with;

• Consider joint ventures to share risks and resources;

• Explore opportunities for co-marketing or bundled services

Embrace Sustainability Practices

Implementing sustainable business practices can lead to long-term financial benefits:

• Reduce energy consumption and waste to lower operational costs;

• Explore eco-friendly product lines to tap into growing consumer demand;

• Consider obtaining sustainability certifications to enhance your brand value

Leverage Data Analytics

Utilise data analytics to gain deeper insights into your business operations:

• Analyse customer behavior to optimise marketing strategies;

• Employ predictive analytics to forecast future financial trends;

• Identify operational inefficiencies through data-driven insights

By focusing on these areas, you can build a financially robust business that's well-positioned for growth and resilience in the face of market challenges. Remember, financial strength is not just about the numbers on your balance sheet. It's about building a sustainable business model, which can thrive in various economic conditions.

As you navigate your business journey, bear in mind that growth, transition, and succession planning are interconnected aspects of long-term success. By addressing these aspects proactively, you can uncover untapped potential and create strategies for sustainable growth in your local market.