Don’t Get Blindsided by Cash Flow
When a business is hurting, I’ll typically look at a collection of items to move them back into the black. And the main issue is always the same: cash flow. The negative or positive effects of cash flow are grossly underestimated.
The reason behind this is often the same too. Business owners generally feel discomfort when discussing money, especially when it comes to asking for the money that they’re owed; money that is rightly theirs. Underneath that lies a deep-seated belief that they’re not worthy of the money that they’re asking for. They don’t value themselves, their time or their work. Sadly, their financial thermostat is set quite low, and they don’t envisage themselves as being worth more than they can imagine.
Here’s the thing: You have the right to follow up on outstanding payments for work you’ve done or products you’ve made. And chasing debtors should be a priority above all tasks in your business.
Making a profit? You still need to be watching cash flow more than any other single thing in your business. Being blindsided by cash flow has been known to take down even the most profitable of companies.
Aside from chasing debtors, there are many ways to improve cash flow in your business.
Quick wins – Immediate Ways to Improve Cash Flow:
- Look at Debtors. In a business that’s suffering, I’ll usually discover the frequency of the income is inconsistent and this can be directly related to outstanding debtors. Your debtors are the first place to look when you need immediate cash flow. These are the people who owe you money. Too many business owners rely on reminder emails to chase the money owed, but sometimes an email follow up isn’t enough. Pick up the phone talk to your clients. I’ve found many clients who owe me money often don’t know a payment plan is an option. Get their commitment, resend the invoice or even take the payment over the phone and confirm in writing the plan agreed upon. Remember the service has been delivered you have every right to be paid and be proactive about it.
- Look at Creditors. Now it’s time to look on the other side of the board. Can you negotiate better terms with your Creditors? A longer invoice period could make all the difference to your cash flow. Asking is not as difficult as you think. Often, it’s a simple conversation where you ask for what you need, and then discussing what works for both of you.
- Improve margins. Review the margin on the product. How can you push the cost price down? Ask your suppliers for an extended invoice period, or whether price reduction possible because you’ve been a loyal client for some time now. If not, this may even mean changing suppliers.
- Raise your retail prices. You’ll be surprised that many of your customers or clients will be happy to pay an increased price.
- Evaluate the cost of everything. Look at the cost price of everything that comes into the business, not only on the products you are selling. This means looking at the price of all expenditure, down to toilet paper and stationery.
- Reduce unnecessary expenses. What are the other expenses in the business that you can live without, in the short term at least? Are there luxury items or experiences that can be cut back?
- Understand ROI. Go through you Profit and Loss Sheet line by line and determine the return on investment for each item. This will give you a clear picture on the items that are valuable and those that aren’t.
- Be diligent. If your business is barely afloat, this is the time to be looking at your Profit and Loss Sheet DAILY. Each day, look at: How many sales you have hit? Which debtors are overdue? Which debtors are due today? Which debtors are due tomorrow? Don’t wait until the day after their payments are due. Remind them in advance.
- Move inventory. Move stock quickly with a flash sale or warehouse sale. You may already be sitting on a lot of cash.
- What can you sell? What assets do you own personally or that the business owns that you can sell to create instant cash flow injection?
- Talk to your bank. Once you’ve taken all of the steps above, and you are still sinking, go to your bank and ask for a boost of liquidity, or debt funding. This conversation is not as scary as you may believe it to be. Take your One-page Business Plan and your Profit and Loss Sheet with you. Talk to your bank with confidence, so they have the confidence to support you further. Providing evidence to support your case is worlds apart from a conversation that has no substance or planning behind it.
Long-term Wins – Ways to Avoid Being Blindsided by Cash Flow in the Future
- The market is bigger than you think, so it’s time to look at ways to take market share. Do a competitive analysis. Where does the quality, branding and price of your product sit in the marketplace? In saying that, you can’t always be looking over shoulder. Be mindful of what competitors are doing but be intentional about what you’re going to do. Do your homework but be the leader of the market by delivering something better. The features and benefits you’re offering should always be easy to define, and they should be significant.
- Debt collection should really be a last resort, so to avoid getting to that point, hire a CFO. You’ll need a good CFO who has your finances under control. They will be doing regular analysis on sales conversions and margins, which will give you an indication of where the business is headed BEFORE it crashes, giving you time to rescue the ship and anyone on it. They’ll get your prices right on both ends and ask for extended terms where required.
- Take the time and effort to review your financials weekly and check the areas that need changing. Even if you have a CFO, this doesn’t mean you can take your eye off the ball.
- Set up future payments for Debtors to offer them a discount for early payments.
- Lease (don’t buy) equipment and real estate. It may seem counterintuitive, but it will improve cash flow.
- Have an automated invoice system that means you’re sending invoices out immediately. The quicker they are out, the faster you’ll be paid.
- Can you change some of your agreements with Debtors to request payment in advance? Depending on the relationship, it might not be such a big deal to ask for advance payment before you ship a tonne of product to a retailer or buyer.