We’ve all heard the saying “Cash is king, profit is sanity and turnover is vanity”, but have you ever stopped to really think about what this means?
When I ask entrepreneurs what success in business means to them, the answers I receive are usually along the lines of “to make as much profit as possible.”
I often cringe when I hear this because it usually means they’re focusing on the wrong thing and consequently are in line to join the 55% of small businesses that don’t survive their first five years.
I’ve been a solicitor for over 15 years and throughout this time I’ve seen many, many businesses come and go and when they close, they take with them the shattered dreams of their owners. I’ve also seen some amazing successes where the owners seem to turn everything they touch to gold with almost not effort.
Why is this?
You may be surprised to hear that in most cases, it’s got nothing to do with whether the business was started with a good or bad idea. After all, how many world changing ideas can you think of that never got off the ground and how many times have you said “how on earth does that make money?”
What I’ve noticed over the years is a slight difference in focus between the successes and the failures. And this is good news, because it means you’re already closer than you might realise to becoming a huge success.
To join the successful, you don’t have to rebuild your business or do anything radical. All you have to do is make a minor shift in your thinking, change your focus by a couple of degrees and you will see the fortunes of your business starting to transform over night.
But if profit shouldn’t be your main focus, what should you be focusing on?
Before I explain, let me explain what profits are.
Profits are just a line on your accounts. A theoretical amount which is left over when (in simple terms) you subtract your expenses away from your revenues.
You usually calculate this figure just a few times each year, when you’re preparing your management accounts and when you’re preparing your final year-end accounts.
But the trouble is, this figure is out of date as soon as you’ve written it down and no matter how large the figure is, you can’t spend profits.
You can only spend cash.
So, cash is what you should be focusing on.
Your focus should be on generating as much cash as possible because when you have sufficient cash reserves, the possibilities and opportunities open to you are endless. It also makes your business more secure and more valuable.
When your business has cash available to it, you can re-invest for growth, you can re-pay debts to reduce your liabilities and give you independence from lenders, such as banks that don’t share your vision of the future. You can pay yourself a dividend and reap the rewards of all your hard work and live the lifestyle you dreamed of when you started the business.
For a business that’s in financial difficulties, understanding this change in focus can be the deciding factor in whether or not it survives. I’ve known people to turn around unprofitable businesses simply because they’ve been able to generate enough cash to pay their bills and buy themselves enough time to refocus their efforts.
These “turn around” experts are often thought of as geniuses but the truth is, they just know what to focus on and every business owner can do the same thing.
Likewise, failing to understand this can lead to trouble and this is why even profitable businesses can be forced to close if they run out of cash. Often, the owner is left bewildered because they thought everything was going well and they had no idea that the end was in sight.
So, how can you unlock the cash in your business?
Most people think there are two ways to increase the available cash in their business – increase sales and decrease costs. But there are actually five keys to unlocking more cash in your business and these are what we’re going to look at now.
More sales equals more cash. So long as you’re selling at a profit (and your clients pay – see more on this below), then increasing the number of sales you make will lead to more cash in your business.
You can increase prices too, so more cash is generated from each sale.
When it comes to raising more cash, sales and marketing is where 90% of a business’s efforts are usually focused because this is what most businesses are good at. They have sales and marketing teams raring to go and this is where the results are most visible.
When they’re successful you can see the work coming in. You can see the hive of activity and feel the buzz of excitement around the office when someone wins a new account or piece of work.
However, while this can be a very effective way of generating more cash, it shouldn’t be looked at in isolation because sales and “busyness” doesn’t necessary mean more cash.
While times are good and you’re making profits, you’ll probably be happy to spend as much money as your business needs because it seems like it’s being put to good use.
But is it?
As your business grows, it’s easy for it to become inefficient. You can lose track of your spending as departments get busier and demand bigger budgets to keep pace with their rate of growth.
This is the very time you should be keeping a close check on costs because increasing overheads can soon become a drain on your cash reserves. You only have to experience a slight slow down in trade and troubles can set in.
The first sign of trouble is usually when cost cutting is considered as a way of saving cash, rather than increasing the amount of available cash.
At this point, cuts can be drastic but there’s only so far you can go before essential spending is cut and then service levels and quality start to slip. This then leads to even greater trouble as sales dry up.
So, to avoid this, always try to run your business as lean as possible.
If you run a retail business, money is tied up in the stocks you have sat on your shelves or in your warehouse. So, you need to keep them as low as possible. However, you need to strike a balance because if you don’t have sufficient stocks you could miss out on sales if your products are unavailable.
Therefore you need to look at your supply chain management.
How quickly can suppliers deliver? The quicker they can deliver, the less stock you need to hold.
Dell Computers is an extreme example of what can be achieved if you take an aggressive approach to inventory management, and while it’s unlikely you will be able to do the same, most businesses can reduce their stock levels with careful planning.
If you run a service business this is obviously going to be more difficult, but you will hold stocks of some things. For example, think about your office consumables. With suppliers offering next day delivery, there’s probably more money than you think sat in the print room.
Increase your accounts payable
Accounts payable is the amount of money your business owes to its suppliers. If you can increase the length of time you take to pay someone, it means this cash is available in your business so you can decide what you are going to spend it on.
Now – I’m not suggesting for one moment that you pay your suppliers late! If you know me, I’m completely against late payments and Cash Flow Rescue’s mission is to get small businesses paid faster.
What I’m saying is that there are other ways to increase your accounts payable.
For example, you could agree longer payment terms with your suppliers. This is controversial and many large businesses are criticised for increasing payment times to small businesses. But you can’t argue against their logic. They’re increasing the amount of cash available to them so they can decide what to spend it on.
But say you can only agree 30 days? What else can you do?
Well, perhaps you could agree to pay in instalments, rather than one lump sum.
What about financing the payments if your supplier wont let you pay in instalments? OK, you’ll have to pay interest on the loan, but by spreading payments this way you could make more cash available for other things.
What about paying on a credit card? You might even be able to earn cash back on it!
Decrease your accounts receivables
Accounts receivables are the amounts owed to you by your clients.
When it comes to unlocking the cash in your business, this is the big one which often gets ignored. But, if you can make improvements here, you can transform your businesses.
Late payment is a huge problem faced by over 60% of businesses and it’s getting worse.
For larger sums (anything over the small claims limit of £10,000), the problem is relatively easy to resolve – simply hand it over to your solicitor and they take it from there, recovering your outstanding invoice and their costs in the process.
But what about the smaller sums?
For those unpaid invoices that might range from a couple of hundred pounds up to say, £2000 to £3,000 the situation isn’t as clear because you cannot recover your legal costs for any dispute under the small claims limit, even if you win!
I think this is hugely unfair because recovering these invoices can make a huge difference to your cash flow and can even determine whether or not your business survives.
So, if it’s not cost effective to use a solicitor to recover these sums, what do you do?
Try a debt collection agency?
They’re cheap and will often send out an initial letter for just £2. But if you want to protect your client relationship it’s not a good idea because when the debt collectors get involved it’s like using a sledge hammer to crack a nut.
So what’s the alternative?
At this point, many people think they’ve got no option but to write the invoice off and focus on winning new clients who will pay on time.
But that’s not going to help either because chances are the new clients will also pay late and every unpaid invoice is another step closer to you joining the 55% of business that fail to survive five years.
So it’s down to you to take control of this situation and start recovering your unpaid invoices yourself.
Thankfully, this actually much easier than you think. All you need is a proven system to follow and the right tools and tactics.
This is what I provide.
I’ve created Cash Flow Rescue to give small businesses all the tools and tactics they need to recover their outstanding invoices and get paid faster. It’s a six stage process but it’s so effective that 97% of people get paid before they reach the end of stage three!
Please click here to see how Cash Flow Rescue could transform your business.
In my experience, decreasing your accounts receivables, the amounts owed to you, is the single most effective way of increasing the available cash in your business. This is because most business owners over look it as something that isn’t within their control. However, with Cash Flow Rescue, that completely changes.
Now you can have complete control over the late payment problem in your business. Click here for more details.