I was talking to a business owner recently who was telling me how he had recently increased his marketing and as a result his turnover had increased dramatically. As a result he was extremely busy. When I asked him if he had any plans to bring some new staff into the business in order that he could cope better, his response was that he couldn’t afford do that. It turns out that although turnover was up, that didn’t translate into more cash in the bank; in fact quite the reverse. When I asked him why did he think that was, he replied, “You know, I’m not really sure….”
It turns out that in order to increase turnover he had reduced prices, so gross profit was lower. And the marketing methods he had chosen were quite expensive. And of course, the higher demand meant he had to buy more stock, so more cash was going out. And because he was so busy servicing customers he wasn’t planning his stock purchases so carefully so had dead stock on the shelf, and he wasn’t chasing the debt so regularly, so incoming cash was reduced. There were a couple of other things but that’s enough to be going on with.
Worse, when we put a cash flow forecast together, it demonstrated that it wasn’t going to get any easier unless something changed.
There are five basic elements to managing cash flow:
If you manage your cash flow by managing each of these items in turn then you will maximise the cash in your bank account for the amount of business you are doing.
So what can you do? Let’s look at them in turn:
The most important thing is to forecast what your cash flow will be and then plan your business strategies around that.
If you would like to understand your financial model a little better why not take advantage of our FREE Finance Review where we come along and spend a couple of hours of our time understanding your business, it’s financial challenges and explain how we help you solve them. Simply emailor call and we will do the rest.