One of the most popular topics that I talk with business owners about is smoothing out their cash flow. For most this means having enough money coming in every month to have enough profits and pay the costs of running your company.
You noticed that I put profits first and operating costs second. This is a habit I want you to start to develop. Profits should not be what’s left over. They should be the thing you think about first because without profits your business will cease to exist.
But, this post isn’t about profits, it’s about creating enough top line cash that you’ll be able to sleep at night. Read on if you’re interested in knowing what you can do to get away from the cash flow hills and valleys in your life.
Have a consistent new sales operation going.
This is where you need to start. In many smaller businesses the following scenario is the way things are done:
You start your month off with no sales booked. You go out and sell, sell, sell both because you need to and because you have the time to do it. Then you have to deliver the work and there’s no time to sell. All you have time for is doing the work.
What do you do? You start the cycle of selling all of the time and there isn’t any cash coming in. You feel like your business is either one that has great riches with lots of business and cash coming in or you’re worried about where the money for your next payroll is going to come from.
I’m betting you don’t want to be in that situation. Instead, why don’t you do this……
Think that when you get to 70% of your capacity you’re full and can’t take on any more clients. If more customers want to work with you, then start a waiting list or hire more people to help. Use the extra 30% of your time that isn’t servicing clients to market your business sell new customers. That way you’re less likely to be on the rollercoaster of feast or famine.
Make sure your key performance indicators tell you what’s going to happen.
I know that you probably look at your profit and loss statement on at least a semi-regular basis. And I’m betting that when someone brings up the topic of KPI’s (key performance indicators) you’re thinking about historical numbers like your profit and loss statement.
Instead, I want you to think about the numbers that are predictive about what’s going to happen with your company in the future. One of those numbers is what I call backlog. That’s how much business you have on the books over the next ninety days.
If this number drops below a certain level, you know it’s time to turn up the heat on your sales department. If the number is too high, you know it’s time to dial back sales and work on marketing efforts that allow more people to become aware of what you do.
I want you to be aware of knowing what’s going to happen, not what’s happened. Yes, your profit and loss statement is important. But only as a long-term planning tool to check your assumptions about what you thought was going to happen in your company.
Learn to read your cash flow statement.
It’s possible to be profitable and run out of cash. That’s what happened to me and it’s because I couldn’t read a cash flow statement. I can promise you one thing, that experience taught me the importance of cash flow and it’s the first statement I look at when I’m thinking about how successful and sustainable a business is.
What, you think that your profit and loss statement tell the story. Well consider this…..
If you increase your inventory, your cash goes down but your profit doesn’t. What about if you increase the amount of receivables you have? Again, your profit doesn’t change but the amount of cash you have goes down. Or, in my case what if you buy a bunch of capital equipment, use your cash to buy it and then wonder why you’re out of cash even though you have very healthy profits.
All three scenarios are ones that business owners all over the world see and are blindsided from. Don’t be one of those owners, manage your cash flow in a way that’ll keep you in business, sleeping at night and smiling during the day.
Are your prices high enough?
I bet that you’ve never tested pricing in your company. Most owners don’t. They’re just too scared to do so.
If you double your prices and lose 30% of your customers, guess what……you’re still ahead of the game. You need to be hearing no because your prices are too high at least part of the time. If not, you can be sure that your customers value your products and or services more than you do.
Stop being a wimp. Test your pricing and stop being afraid of charging what your worth.
What’s your Red Velvet Rope policy?
Do you know what a Red Velvet Rope policy is? This is where you are clear about who you’re meant to serve and what that group of people value. If you don’t have a clear answer about this question, stop now and answer it.
If you don’t know who your best customers and best potential customers are you’re spending too much time serving those who don’t value what you do and aren’t willing to pay you what your worth.
You’re going to have to learn to use the word no and you’re going to have to do some real soul searching to figure out who you’re meant to serve. If you want a great primer on this whole topic take a look at Book Yourself Solid. You’ll learn how to craft your own Red Velvet Rope policy. Once you do, don’t let you or your staff call on anyone but the A Customers in your life.
Be honest with yourself.
I’m ending this post with where you should start. If you’re not honest with yourself about where you stand, there is no chance that you’ll adopt anything in this post. Telling yourself the truth about where you stand is always the starting point. If not, you’ll never know whether you have a little or big problem or if there’s no problem at all.
Why don’t you leave a comment below and let me know what you think about managing your cash flow? Remember this saying……happiness is positive cash flow. It’s true for me and I know it’s true for you as well.