Are you sick of ‘band aid’’ solutions to cash flow chaos?
Cash flow is one of the biggest issues faced by business owners. It’s a constant battle to find enough cash to pay everyone on time and at the end of the day there often isn’t enough left to pay yourself. This can be very disheartening if you allow yourself to be a victim of poor cash flow.
The way to overcome this situation is to take control of it and treat it as a ‘holistic’ exercise, rather than constantly applying ‘band aid’ solutions. You need to fix cash flow once and for all, so it ceases to be an issue in your business ever again.
I’ve summarised these 7 Steps. If you’d like to know a bit more detail about each of the steps, feel free to download our eBook:
The 7 Steps:
- Step 1 – Produce a Cash Flow Forecast. This can be a simple spreadsheet that plots out in black and white all the cash coming and going in your business. Trying to figure it all out in your head is just too stressful. Once you plot it all out on paper in a Cash Flow Forecast, it makes it much clearer and easier to understand where the ‘peaks and troughs’ are going to be in your cash flow situation.
- Step 2 – Customers – One of the biggest issues causing cash flow problems is customers who don’t pay on time. You go through all the expense and effort of delivering a great product or service then you have to chase them to get paid what you’ve earned. You need a process that allows as little room for manoeuvre for customers who pay late as possible.
- Step 3 – Suppliers – A great way of keeping cash in your bank account for longer is to not pay suppliers any quicker than you need to. I’m not suggesting just stringing them out without agreement. Most suppliers will agree to terms for you to pay if you have a good credit history. Your job is to negotiate with suppliers the best terms possible, because every day you pay them earlier than necessary is a day the money isn’t in your bank account.
- Step 4 – Stock and Work in Progress – Think of stock and work in progress as dollars piled up on the stockroom or workroom floor. You’ve had to outlay money to pay for the stock to sit there waiting until customers want to buy it. If it sits there too long it’s precious cash flow that could be used for something else. Similarly work in progress is labour and materials you’ve had to outlay on jobs that may not be finished yet and able to be invoiced. Every day jobs aren’t finished and invoiced is a day the money isn’t in your bank account.
- Step 5 – Costs and Overheads – Costs are generally the direct costs of your product or service that you sell. Overheads are all the other stuff like rent, wages, advertising etc. These can so easily get out of hand and creep up, so you don’t notice that all your sales are being eaten up and there’s nothing left at the end for profit and to pay for everything. These need regular review to ensure there’s nothing that shouldn’t be there wasting cash.
- Step 6 – Pricing – A lot of businesses handle pricing in a haphazard way. They take a stab in the dark often on pricing or copy competitors or try to undercut them. The big issue about pricing is understanding the ‘true cost’ of what you’re selling. If it’s a product you need to calculate everything that’s involved in getting it ready to sell, to ensure there’s enough margin allowed for a profit and to cover overheads. If it’s a job or project you need to factor in all the labour and material costs associated with the job to ensure you’re charging enough to cover them, allowing for some profit and to cover overheads.
- Step 7 – Sales – Funny that I’ve left sales until last isn’t it? It’s a common reaction to cash flow problems to think “We just need to sell more”. The issue here is if what you’re selling isn’t profitable and those you’re selling to aren’t paying on time… Making more sales will just increase cash flow problems! So once you’ve got all the other stuff sorted out you’re then in a position to sell with confidence knowing it will result in profit and good cash flow.
If you can proactively work on and manage each of these 7 steps you will be well on the way to better cash flow control and less headaches. You also may not have to borrow money at all because you’ve got it all under control. This could save you a fortune in unnecessary interest expense.
I’ve summarised these 7 Steps. If you’d like to know a bit more detail about each of the steps, feel free to download our eBook