As published by CCI WA – Business Pulse Magazine – Page 30 (Link below) : Title : Go with the Flow.
“Dealing with cash flow headaches requires a long-term approach, not short-term fix-ups”
For many SME’s January and February have no “Holiday season appeal”. Unless you are in retail or hospitality, and your business sales naturally increased in time for Santa’s trip around the globe….. this can be a pretty “Cash flow Poor” time.
If you Google: “Improve Cash flow” or approach your accountant for ways to improve cash flow, the most common responses will be:
- Reduce debtor days – shorten the time it takes to recover money from your customers.
- Lengthen creditor days – extend the time it takes you to pay your suppliers,
- Improve the time between buying stock and selling it to your customers.
But, what if the Cash flow Crunch is not just a seasonal December to February time frame…and seems to be a yearlong battle of “Money in and Money out”?
What if you are a business that runs mostly on cash? How do you improve debtor days then?
What if you don’t have accounts with suppliers – and mostly pay your bills when they are due, or pay as late as you can anyway? And what if your biggest “supplier” is staff…who wont be very happy with a delay in wages.
What if you don’t only sell products and mostly sell a service…or we know that we order stock “Just in time” anyway? It’s a bit hard to work on stock days then!
“Small Busy-ness Syndrome”
Well, in the real world of small business, tweaking debtor, creditor and stock days – IF they even apply to a particular business – is really only treating the symptoms of a sick business.
To cure a business, we can’t get long term results until we find out why it’s ailing in the first place. What’s the root cause of money just coming in and going out with no control? What is it that’s making the business owner run around like a headless chook chasing the sales, but not making any real financial gain?
It’s shocking how many SME businesses actually MAKE NO REAL PROFIT on some parts of their business – or even on ANY part of their business! What’s worse is the owners often don’t even know it. I call this ‘Small Busy-ness Syndrome’.
Let me explain… Sam started his business with the main product/service being shop front signs. The costs involved in providing this service are the metal sheeting, the special ink, the designer to design the images, and the labour to install it. At this point its crystal clear as to how much money he makes in delivering this product.
Fast forward five years, Sam has become the one-stop-shop for all things signage. He has TEN different types of signage products, most with their own unique materials, and some unique labour. Sounds great doesn’t it?
Unfortunately, Sam is really frustrated. He spends most of his time and energy chasing sales, but money just keeps pouring in and then straight out again. His bank account is a bucket shot full of holes. He would love to narrow down his focus to just one or two areas, in the hope of making some kind of profit – or any real money at all. But he just doesn’t know which area to focus on! Is it the shop front signs? Is it the car wrapping? Is it the billboards? Argghh! He’s tearing his hair out in frustration.
So how CAN we improve cash flow in these cases?
You know, we could work on Sam’s debtor days, creditor days and stock days until the cows come home (… and perhaps mercifully stomp on the headless chook). But that’s not a long-term solution.
Without identifying the true problem, we can do no good at all for the health of Sam’s business.
Clearly, the solution for Sam is to help him find out which areas, which products, which services are making money – and which are not, so he can go ahead and make some rational decisions. The ONLY guaranteed way of understanding SME cash flow and improving it (long term) is to analyse product/service profitability.
Throwing out the Band-Aids
Having money in the bank account is about ONE – and only ONE – rule:
WE MUST SELL WHAT WE DO FOR MORE MONEY THAN IT COSTS FOR US TO MAKE AND/OR DELIVER OUR PRODUCT AND/OR SERVICE!
Do you know any other GUARANTEED way of making sure more money stays nice and cosy in a bank account? I certainly don’t.
It’s a simple rule, more than just a theory. And it’s been tried and tested over and over, with many SME clients.
Health and Well being for SME cash flow
A Product /Service review could save Sam’s hair and his sanity by …
- Providing clarity on the money made by each product /service / group of products or services
- Presenting a helpful set of choices
- Enabling quick action on the products/services not producing profit
Yes, with our help, Sam’s business could surely find the right direction for him and begin to thrive.
[Analysis and improvements based on this simple rule has resulted in some amazing improvements for local Perth SME’s. A white good trader business improved their Gross Profit % by 6% in a few weeks. A service based website business improved GP% by 7%, and a local Subiaco coffee shop improved their GP% by 13% after only one month!
It’s no wonder multi-award winning Tracey Loubser of Confident Cashflows has been dubbed the ‘Queen of Cash flow’ after a successfully working with SME businesses since 2009]
https://cciwa.com/member-benefits/Publications/business-pulse : Page 30
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