Article written by Bert Weenink (ActionCOACH – Kempton Park, Gauteng)
In business, it’s not uncommon to have millions of Rands worth of turnover without generating adequate cash flow to support business growth. It’s a well-known fact that growth in any type of business consumes cash which according to Verne Harnish is the first law of entrepreneurial gravity.
There are three laws of entrepreneurial gravity:
- Growth eats cash – a growth business is hungry for cash.
- Buy low and sell high – ensure you buy right so you can achieve the gross profit margins that can sustain the business.
- Visibility equals credibility – Your business must be visible, and this brings credibility, and lastly profitability.
So, what is entrepreneurial gravity? It can be defined as “those unavoidable forces” that draw on a business owner or entrepreneur.
There is a saying in business that states “Turnover is Vanity, Profit Sanity and Cash is King” and if you are serious about fixing your cash flow, I suggest that your read Instant Cash Flow written by Brad Sugars (Founder of ActionCOACH).
So why is the management of cash so important? Well, think of it this way, cash is to business as what fuel is to your car. If you run out of fuel the car stops. It must therefore be your primary business goal and focus as a business owner to keep fuel in the car or have a healthy cash flow.
Yes, you can have a company with a healthy profit and still run out of cash, because cash flow is the sum of income and expenses realised.
Do I need a cash flow forecast?
You certainly do. Your cash flow statement and forecast differ from an income statement because it tracks the actual flow of money into and out of your business.
It starts with your beginning cash – money in the bank, add to it your receipts or funds that come into your business and subtract disbursements, funds that flow out. You will then either have a cash surplus or a cash deficit. Remember your accounting software should be able to give you that picture.
It is possible to dramatically improve your cash position whilst growing your business – here are 10 things that you can do or act on to improve your cash position:
- Stop saying that we are in a seasonal business and “it is just the way it is”. Know your turnover breakeven point and ensure you hit that number every day, every week, and every month.
- Run your available cash report daily – and understand why it has changed.
- Manage your cash gap – increase supplier payment terms and send your invoices out quicker, don’t wait for month-end.
- Understand customer payment cycles, especially at year-end, and time your billings accordingly.
- Shorten product and service delivery cycles – measure your “work-in-progress.”
- Get key customers to pay sooner or implement a Cash on Delivery (COD) policy.
- Reduce your fixed costs. Most of the businesses I start to work with can reduce their expenses and cut out some “nice-to-haves.”
- Don’t replace your staff resignations immediately – critically evaluate the need for the role and can it be automated, eliminated or re-allocated amongst the team.
- Get customers to pay a deposit or bigger deposit when your business has a long manufacturing cycle, and a high cost of goods sold.
- Brainstorm three ways to immediately reduce your cash cycle and increase your operating cash position.
Have you identified some quick action areas?
Now is time for ACTION. Remember nothing changes if you don’t take action.
If you would like the support of a Business Coach on your path to managing your cash flow, contact us today.