I thought I would lead with a conversation that everyone can relate to… Cash flow. Every business needs positive cash flow, that’s a no-brainer. Let’s delve into the reasons why cash flow is important, and some tactics that can be used to analyse why your cash flow may not be where you want it to be.
Cash is King. That’s a saying no matter what generation you are part of, you would have heard. There’s a reason why this phrase still resonates even in today’s digitised world. And that’s because it IS king. Without cash on hand, every business from the humble start-up to a corporate empire leader WILL run into trouble and possibly face bankruptcy.
Businesses need to have cash on hand for many reasons, pay the bills, the employees, to recover from unexpected situations and expenses, to ride out an economic downturn and for future investment and growth.
A business could have the most fantastic sales and revenue record, have a huge turnover and the most promising business model, but if it’s running with inefficient financial operations, then that business on a path to a slow and painful end.
But it’s not all doom and gloom, I promise! There are simple and effective ways to transform cash flow from negative to positive, and it doesn’t always have to equate with working harder and longer. Here are some simple steps:
Step 1: Acknowledge the Problem
This may seem like an odd point to make, but you would be surprised how often I work with clients who have never really acknowledged that there is a problem. If a business is suffering from a chronic cash crunch, then the first step is to acknowledge, take a deep breath, and understand that this CAN be fixed.
Step 2: Find the Culprit(s)
I often speak to clients who find this step a monumental obstacle. What I like to teach clients is that there really are usually only a handful of true causes to a cash crunch. I constantly refer my clients to the CASHBAG formula. It’s really easy and really simple to remember.
Cost of Goods Sold
Amount of Discounts
Holding onto Inventory
When you analyse these items using the cashbag formula, it turns your cash chaos into logic. You may only have one culprit crunching your cash, or you may have all of them. The point is that once you acknowledge the issue, find the culprit (or culprits), you are now empowered to take control and resolve the issue.
Step 3: Plug that hole
So now we come to the third and final step, plugging the hole. Maybe you identified that the cost of your goods sold is larger than you would like it to be, or that the average shelf life of stored inventory is excessive. Now you look to ways of redefining how you produce your product or service to get better profit out of EACH sale, and not just making more sales. This can be done through many avenues, researching better production methods, leveraging an asset or skill already within your control, investing in new technology, learning from industry leaders or investing with industry specialists (did someone say bookkeeper? *cough cough*)
All jokes aside, you MUST take action if you want your business to be a success. Remember CASHBAG and take control of your cash chaos, because for as long as business has existed, so has cash, and I seriously doubt that it will ever be de-throned any time soon.