One question that seems to arise more often than any other is “How do I get a better grip of my cash flow?”
Many business owners find controlling their cash flow a real challenge and think that it’s complicated or they need to be an accountant to understand it. To get a grip of cash flow takes a bit of focus and building some habits that will get you more comfortable with your numbers.
So here are my top tips to help you really change the way that you manage your cash flow that is simple and effective.
PROFIT MARGINS
Knowing and controlling your gross margin can make or break your business. If you don’t know your margin you cannot make informed decisions on what to do more of and what to stop.
The amount of gross margin made per sale acts as a contribution towards the company’s overheads. Knowing how many sales you need to break even and cover your overheads gives you clarity for setting targets and managing cash flow.
Gross margin is a critical business number that every company needs to monitor and track. A failing of many businesses is not having an understanding of the margin needed to maintain a healthy company. One of the main causes of business failure is lack of cash – this is often a symptom of poor margin control. A relatively small change to the gross margin can have a significant impact on the business as a whole. You need this number to calculate your breakeven point.
Can you identify your margins on every product and service you offer? This immediately implementable task could save your business and certainly improve cash flow very quickly.
GROSS MARGIN % = Gross Profit x 100 / Sales
CREDIT TERMS
The credit terms given to your customers can have a devastating impact on cash flow if not thought through properly. How long do your customers take to pay? Is it longer than the terms allowed? Keeping control of debtors (the funds owed to you by customers) is essential for good cash control. If you are giving your customers too long to pay (or they are taking longer to pay you than they should) then you are funding their companies. This was a practice used by supermarkets in the past – crippling farmers and other suppliers.
Quick ways to improve this are:
- Change trading terms
- Ask for partial or full payment in advance
- Get a consistent credit controller process
- Charge interest on late payments
- Pre-credit screen your customers
- Understand your rights and the court process for debt collection
- Stop supplying bad payers (unless they pay in advance)
- Track your debtors days – and keep them low
DEBTOR DAYS = Average trader debtors x 365 / Sales
REVIEW OVERHEADS
The break-even point is the levels of sales the business requires to cover their costs and make zero profit (but more importantly zero loss). Control of overheads means a lower break-even number. A company’s overheads are all those costs that are incurred even if you didn’t sell anything this month. Overheads are any cost that would have been incurred regardless of the volume of sales activity.
You should be able to split out elements of your overheads into groups such as premises, staff, marketing, IT and administration costs. Tracking these numbers allows you to see if your costs are increasing and understand why. More importantly, it means you can take corrective actions quickly.
A review of overheads often finds costs that can be eliminated without impacting the business, such as:
- Subscriptions for software or services no longer in use
- Retainers that are not providing value
- Purchases from suppliers with high prices
- Unnecessary spending that adds no value
- Overpayments of rent, rates, utilities
- Duplicate payments and deposits not returned
CASH FLOW FORECAST
A cash flow forecast helps you keep control of your cash and prepare for when there are peaks and troughs in your cash. Having a handle on your cash flow is one of the most important aspects of business management – because cash is the lifeblood of any business (even not-for-profit and social enterprise).
Cash Flow forecasting sounds complicated, but it should be very simple and relatively easy – it’s mostly about finding the model that works for your business, that makes sense to you.
Keep it Simple.
The more complicated you make something, the less likely you are to maintain it. Equally, if you have someone producing reports for you, make sure you can read them – if you don’t understand them, then they are a waste of time!! Review the cash flow forecast as often as your business needs to. Always start with the current cash position. At first using any model might seem a bit fiddly, but with practice, it becomes a useful tool to test the cash resilience of the business.
Do you feel like you have no control or don’t understand your numbers? Discover how you can feel more in control of your business, make your business worth more AND make it easier and more fun to run. Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses in better shape so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.
