Keeping track of your cash flow is an essential part of a successful business strategy, but it’s also one that is often neglected. Many entrepreneurs will watch their sales and take note of their revenue while avoiding any analysis of their cash flow.
Revenue is certainly important because it indicates how much money your business is bringing in from sales. However, it isn’t the whole story.
You need to know what your profits are too.
After you’ve paid all of your expenses, what are you left with? Cash flow gives insight into this because it looks beyond just sales to offer a full picture of the money that is both coming into your business and going out of it, and when. It shows you how liquid your finances are, which revenue cannot tell you.
If you don’t look at your cash flow, then you may find that your finances aren’t making sense. You can have numbers in the revenue and profit columns that look great, but still catch yourself wondering where your money is. In order to get a sense of where your money is going and to know how much is available to you at any given moment, you’ll need to study your cash flow.
The key here is ‘visibility’.
You need to keep your eyes on the whole financial picture, or you cannot make informed decisions. Visibility means looking at your cash flow, your margins, and also setting up some key performance indicators for your business. If you’re not watching for these things, then you’re keeping yourself in the dark about your finances.
For instance, if you introduce a new marketing initiative and you aren’t focusing on your cash flow or maintaining the visibility of your finances, how will you know if this new strategy is working? Revenue is only going to tell you information about your customers’ transactions.
Cash flow is still going to look at your sales, but it’s also going to take into account other things, like what you’ve just spent on your new marketing endeavour and when it needs to be paid. This will give you a better sense of if this is a worthwhile investment for your business, or if you need to try something else.
Don’t be afraid to learn about your money.
Many business owners struggle to look at things like cash flow and margins because they don’t know where to begin. It’s not that they haven’t been advised that visibility is essential before, or that they don’t think it’s important to keep track of cash flow. Instead, they might just not know where to get started and are too afraid to ask.
This mindset is totally understandable! After all, there’s a lot of numbers in play and they can be daunting. Furthermore, many entrepreneurs use bookkeepers and accountants to maintain their finances, but they may not actually understand how to interpret the reports they get or even realize that a more in-depth analysis is needed from them to maintain the health of their business.
Finances are very complicated, and that makes it easy to put off digging into your books and making yourself learn about where your money is coming from and going to.
However, this kind of analysis paralysis can be detrimental to your business. If you want to be a successful entrepreneur, you have to make yourself understand your finances.
One great strategy to help simplify things is to break it down weekly. Instead of waiting until the quarter is over, study your numbers at the end of each week. This will help give you a much clearer perspective of your cash flow right off the bat.
You should also know which numbers and metrics are most important. There’s no need to make things more complicated than they already are.
You’ll want to look at what money comes in as income, as well as what your expenses are. Depending on your industry, you may also look at your net or gross profit.
In general, however, you don’t need to try to take over the role of your accountant – you pay them for a reason! Start small and keep it simple.
How can you increase profits?
Once you have your eyes open and are regularly watching the transfer of funds through your business, you may start to wonder how you can up your cash flow. After all, who doesn’t want more money?
The good news is that you don’t have to completely overhaul your methods or even make very big changes at all to see a positive effect on your cash flow. There’s a couple of great ways that can help improve your numbers.
Look into generating more income.
You can start by looking at the average amount of money that each individual customer spends at your business in a single transaction. If you can raise this number by just 1-2%, then you’ll start to see a lot more money flowing into your business.
However, because this target increase is relatively low, you shouldn’t need to implement major additions or revisions to your current strategy. Though the impact will be big, it can usually be achieved with minimal effort and a few very small adjustments.
You can also always raise your prices. Many business owners are afraid to take this step, but it doesn’t have to be a dramatic increase. Furthermore, there are ways to handle price increases that maintain customer loyalty and value, while still giving your profits a boost.
Pay attention to expenses as well.
Increasing sales is an important part of improving your cash flow, but so is spending less money. You should get into the habit of regularly reviewing how much you pay your suppliers, as well as looking at what the cost is for any services you routinely purchase. From there, you should try to see where expenses can be optimized.
However, this doesn’t need to mean that you cut back on products and services. You can accomplish a decrease in spending with something as simple as making a phone call to the phone company to negotiate your plan. This should be something that you address often, maybe once a month. If you can cut down your bills by just half a percent here, or one percent there, you can start to see a substantial benefit.
Like compound interest, taking these small steps will have a growing impact on your business over time. Raising your profits by 1% may not sound like a lot, just like it may not seem substantial to cut costs by half of a percent. However, if you manage both and then wait and watch the numbers, you’ll see that the benefits accumulate.
Additionally, it’s a lot easier to try these strategies than some more complex ones. It’s great to test new marketing methods and try to gain new customers, and that may be a valuable part of your business plan. However, it’s going to be a lot simpler and quicker to get your existing customers to buy one small add-on at checkout than to make a sale to someone who is new to your brand.
At the end of the day, maintaining the visibility of your finances is going to be essential to ensuring that your business is profitable and successful. If you don’t know what the situation is, you can’t effectively change it. So if you want to raise your profits, you’ll need to start by understanding your cash flow.
This blog was written loosely based on a conversation with Alvin Narsey on the Simplifying Entrepreneurship Podcast.