The Magic of Cash Flow: Fueling Business Growth through Effective Management is the final article in a four-part series that explores the four pillars of a successful business. These pillars helped me increase my revenue and profits tenfold. With the business roller coaster ride of the past three years combined with the unsteady retail economy, this is the perfect time to get back to basics, and I am bringing you with me.
The books Scaling Up by Verne Harnish and Traction by Gino Wickman became my how-to guides over the past 12 years on building a business that is sustainable and scalable. The things that I have learned allowed my business to weather the Covid shutdowns and the wild swings in sales that followed. I am revisiting these guides this year again to inspect my business’s foundational pillars.
- Strategy – Creating a business growth strategy that you can live every day.
- People – Leading is about letting go and building a team.
- Execution – The plan is only as good as the execution.
- Cash – Manage your cash flow, manage your growth.
When you are in a cycle of scaling up, managing your cash flow is critical so you don’t scale yourself into a negative cash situation. Growth burns through your cash at an accelerated rate and is the fourth pillar to creating a business that can grow and sustain. There is a philosophy of keeping three month’s to a year’s worth of operating capital on hand that successful large businesses, like Microsoft, adhere to. That’s a wonderful sentiment when you are a giant, but what about us smaller bootstrap businesses? How do we manage cash past the daily struggle of keeping products on the shelves and the lights on?
The first step is understanding what the cash flow challenge of your business is.
Your cash flow is the oxygen of your business – the income and expenses are like breathing in and out, they keep you alive. The longer the cycle between your outgoing expenses and your incoming cash, the larger the inhale of cash needs to be to sustain the between time.
The first cash lesson is the cash acceleration strategy or CASh. Harnish shows you how to measure your cash conversion cycle (CCC) – the time it takes you to convert your sales into cash. For the retailer, it feels like your conversion is immediate. The customer comes in, chooses their items, and then pays you. However, if you take into account the time it takes from when you purchase the product you predict will sell until the time you actually make the sale, there is a much slower cash cycle than it appears.
This is not a matter of falling into the false perception of “that’s just the way it is in retail.” You can start challenging your own business’ cash conversion cycle by getting together with your management team asking some hard questions and uncovering the hidden opportunities. Start with the following and allow yourself to break out of old perceptions:
- Report daily on your cash on hand and question why it has changed day to day. Look at what factors affect it and outline the pitfalls you are experiencing. Look at your accounts payable (bills) and accounts receivable (sales). Your receivables are the deposits from your merchant account, online sales sources, and any custom items you attain for your customers.
- How can you shorten the time between purchasing inventory to when it is sold?
- Require any special orders or services to be paid for in advance.
- Give a higher value to your customers who pay in advance.
- Identify where you can add subscriptions, memberships, or other types of repeatable income models.
- Pay as many expenses with a credit card to leverage the additional payment time. Make sure to pay off your balance monthly to avoid interest.
- Identify all the sales mistakes that cost you money.
Brainstorming the interruptions in your cash flow and potential improvements gets you into a cash flow mindset and establishes a solid cash flow foundation.
Training your key management team in the cash flow mindset is about getting clarity on your numbers. Starting with a simple understanding of what your weekly, monthly, and quarterly financial needs are set the foundation that everyone can work from. These are the things to figure out to get that understanding:
- Identifying your target profit margin.
- Tracking your overhead and breaking it down to a weekly schedule of payment or savings.
- Tracking your cost of sales and marketing and making sure you budget for it.
- Knowing what your cost of goods is and what your percentage of margin is to accurately price them.
- Tracking your sales to identify the rhythm to capitalize on with marketing and promotions.
These basic numbers that you can track daily and weekly will take you from ugly suprises into powerful decisions that can grow your business. In standard business terms, you are building your forecasting and budget.
Budgets do not have to be the complicated 10-page presentations that you see large companies do. This can be a one-page spreadsheet that predicts when your cash will be flush and when it will be tight based on your standard business cycle.
For instance, you can set a simple spreadsheet for a month that predicts where your money will be:
|Week 1||Week 2||Week 3||Week 4|
|Sales & marketing costs||250||250||250||250|
|Profit or loss||250||250||250||250|
Expanding this to a quarterly plan will allow you to predict events, large purchases or inventory stick up and watch for dips in sales. You can add details as sales and purchases happen and then start to look for cash leaks, how discounts will affect your bottom line and ways to leverage your cash.
Harnish has a powerful worksheet called The Power of One. This worksheet challenges you to use your predicted cash flow and change one number at a time to see how it will affect your bottom line.
- Increase your prices
- Increase your sales volume
- Reduce your cost of goods (Inventory cost)
- Reduce your overhead
You can use this to see what would happen if your rent goes up, you add an employee, you bring in a new service, or you add a marketing cost. You can add to your predicted income and add the resulting cost increase to watch what happens to your profit and loss.
Extending this out many months can show you what your bottom line will be in slower months so you can save cash in your busier months. You can target large trade shows and save the cash you will need to take advantage of better prices on inventory.
This base cash flow can also help you leverage financing options and manage their payback.
With the enticing new financing options that merchant accounts offer, you can add them to your predicted cash flow to see how they will affect your cash flow long term. PayPal, Square Space, Shopify, and Amazon have money they want to give you, but it comes at a price. That price is an automatic deduction from their payouts to you. I have talked to many business owners who have used those financing options and have taken too big of a hit on their daily income. The businesses that have used this to their advantage, have tested their impact on their cash flow before signing on the dotted line.
Banks, on the other hand, want to see a cash flow before they lend you money that has a lower interest rate and a payback that you have better control of. Even SBA loans will require the same information. When you have a history of cash flow predictions that you use, and update with your actuals, it puts your business in a more lendable light.
Cash Flow isn’t just about the cash on hand, it’s also about your inventory levels, debt level, assets, and liabilities. Key performance indicators (KPIs) are ways to track them and how they will affect your daily cash flow.
KPIs are the secret sauce for scaling your business up. When you know how much inventory you need to have on hand to make the sales numbers you need, you measure it to make sure it doesn’t get too low or too high. When you know your average sale, you can make sure you buy products or price your products in a way to maintain that or raise it. When you know the return on investment you want from a marketing or ad campaign, you know where to spend more. When you know how much each staff member needs to sell in a shift, you can tell whether they are an asset or a drain.
KPIs bring transparency to your business and when you track them weekly and monthly, you can make changes and improvements before it is too late to recover. You can see sudden trends, cash leaks, and heaven forbid, theft.
Cash flow forecasts, KPI’s, and experimenting with how simple shifts can change your bottom line prepare you for managing risks and contingency planning. No one can predict when disaster may strike, but using your cash flow to create a cushion for emergencies may be the difference between surviving an emergency and shuttering your doors.
One business coach shared the wisdom of saving 2-5% every day. Saving 2-5% isn’t a big number from your income, and yet saving in a rainy day fund is a powerful way to protect your future and get started on your three-month operating expense fund. It’s like your own insurance in the future. Combine that with a robust insurance policy and your risk management plan has begun.
The chapter on cash flow has many more formulas and worksheets to explore to master your cash flow. Cash is king, and more importantly, cash is oxygen. Take a deep breath and a day or two to dive into your cash flow plan and you will understand where your first steps are to scale your business.