Brian Walsh of Entrepreneur and lately the “Real Success Club” always says “get clarity!” I say “If cash is King, then clarity must be Queen!”
So, let’s start off by getting ourselves very clear on what is and what isn’t.
Cash flow is the measurement between money coming in and then going out of your business. If you have more money coming into your business than going out – that’s a good thing because it is a positive cash flow and is, therefore, a profit. If you have more money going out of your business than coming in then you obviously have a cash flow problem!
There are only three (3) types of issues that cause cash flow problems and these are:-
1. You’re not making enough money. This usually means that you have to increase the number of sales that you are making or alternatively it may mean that your margins are incorrect, which means that your profits are too small or even non-existent. Either way, you are not making enough money.
2. You are not getting your debtors to pay you. That means that your money coming in is insufficient to meet the needs of your money going out.
3. You are spending too much money!
Let’s unpack these individually.
You’re not making enough money.
As can be clearly seen from the above, this can be broken down further into two parts.
The first part is about sales. You are not selling enough product or service and you need to get yourself out there and sell! If that is not your strength, then you need to hire someone whose strength it is and get them to sell. If your marketing or branding needs to be improved or your product or service is the problem that needs to be updated or improved, that needs to get done sooner rather than later. Whatever must happen, must happen and then you need to sell, sell, sell!
Test and measure and then test again along the way so that you can see where things are going awry and then “tweak” them and test again. Throw away what doesn’t work and move on. Replicate what does work, it’s really as simple as that.
The second part being your margins is a little more complicated. In order to calculate your margins correctly, you need to know exactly what your cost of the product is and what your cost of sale is. There is obviously a huge difference between whether you are selling a product or a service but irrespective of which you sell, the issue is the same but from different perspectives and I will deal with each of these issues more comprehensively next time.
Struggling to collect your money.
Again there are two avenues here and again I will deal with them in more depth in a future article.
Basically, they are:-
– Being a registered credit provider and carrying a ‘book’ and
– Being a regular, no credit offered type business.
In both cases, you need to be in control of the money that is owed to you and the payment thereof. In other words, you need to collect the money that is owed to you more effectively.
In both cases, you need to ensure that an ageing analysis is generated on a regular basis to ensure that you collect your funds timeously.
Do NOT become emotionally attached to your wayward clients. Decide on the rules e.g. if they haven’t paid in 30 days they get a lawyers letter and if they haven’t paid in 60 days they get handed over to the lawyers. Stick to whatever it is that you have decided upon – no exceptions!
You are spending too much money.
Systematically go through your General Ledger and look at each and every expense and see how you can cut it.
Again, check your emotions at the door, if your staff are no longer productive for a full day, chances are that your cash flow will no longer sustain them. Start a retrenchment process.
Next time we will delve a little deeper into the mystery that is cash flow to get a little more clarity