The internet has caused an explosion of knowledge or the availability of knowledge. This has caused people to continually search for something new to help them. This is obvious with diets. Although there is already a large amount of information on dieting, people are always looking for that new improved diet to help them lose weight.
I have found the same thing happens with people managing a business. They are always after the latest product that will give their business the edge. I have experienced this a number of times over the past few months. I receive comments about how my presentation or e-book has nothing new in it.
Although there is nothing wrong with trying to continually improve your business, research shows that around 85% (just like the weight loss industry) of new business management products add no value to a business except to the person selling the product. However, we keep trying to find that silver bullet to our business the edge.
I am not saying these new management theories or products are bad or don’t work. Many will work in the right environment. However, many businesses haven’t mastered the basic principles needed. Those old pieces of wisdom that haven’t changed in years.
The formula for gravity hasn’t changed over the years. NASA has to get this formula right before trying any of its new technology when launching a space shuttle or the shuttle will come crashing back to earth. The same principle applies to business. If you don’t understand the critical numbers and how they affect your business then any gains from new management theories will be short lived.
Before trying to find the latest and greatest product to help your business make sure you have the old tried and tested basics in place.
Why did you originally go into business? We all have different reasons for starting our business. Some wanted to be their own boss. Others believed passionately in their product or service. Some of us just wanted a better lifestyle.
I started Beyond the Numbers to help small business owners who were making less than the average wage. Working as a tax accountant I saw that at least 80% of small business owners were working incredibly hard but earning less than they would if they were in a job. While there is nothing wrong with my motivation to start my business it did lead me to make the biggest mistake a small business came make.
The biggest mistake any small business can make is to fail to accept they are running a business.
Many people that I speak with are passionate about their business and how their products can help others. However, many fail to accept either consciously or subconsciously they are running a business as well trying to keeping customers happy. I made the same mistake that I was advising against to my clients. I can’t explain why but I thought these rules didn’t apply to me.
If you don’t accept that you are running a business you will only ever focus on one of the two critical ingredients of a successful business. The critical ingredients in any successful business are customers and cash flow. Many businesses focus on satisfying their customer but either neglect or don’t know how to focus on satisfying their cash flow. Without cash flow you will never be able to accomplish the reasons why you started your business.
One of the reasons why people don’t focus on cash flow is because they fear or don’t want to know anything about the numbers. They wish they could just focus on doing what they love best and completely ignore the numbers. I completely understand, I feel the same way about marketing and networking. However, you will never have maximum control of your business if you don’t understand its critical numbers.
To accept that you are running a business does not mean you abandon the reasons or motivations for starting your business. Or that you must make all decisions purely based on a financial basis. Quite to the contrary, focusing on running a business by satisyfing the cash flow should enhance your ability to achieve your goals. A healthy cash flow reduces stress and creates more opportunities to help your customers and achieve your goals.
If you have failed to focus on the cash flow of your business then discover the five critical numbers that will help you keep more cash in your bank account with our FREE ‘Kickstart your Profits’ consultaion. During this consultation we work through the five critical numbers of your business and develop practical strategies to kickstart your profits and retain more cash.
This blog continues on from yesterday and describes the internal factors that can affect cash flow. Internal factors are those that are within the control of your business. It is important to diagnose the factors that are affecting cash flow in your business. If misdiagnosed you will waste valuable resources trying to fix your cash flow problem. The examples in the factors are based on a book retailer like yesterday’s blog.
- Profitable – For a sustainable positive cash flow a business needs to be profitable.
- Debtors, stock and creditors – Poor control of these three factors can cause major cash flow problems. They are the silent killers of cash flow. For example, when the shop moved into the larger premises the amount of stock doubled, this stock had been financed from the cash in the bank.
- Over capitalised – The purchase of assets that are not producing a reasonable return on investment will affect cash flow. For example, the new shop required new fixtures and fittings however there was no increase in revenue from the investment.
- Too high borrowings – The business has borrowed too much and its loan repayments are causing cash flow problems.
- Taxation – The business can encounter problems when it doesn’t set aside money for income tax. Another problem is spending GST or VAT collected before remitting it to the tax department.
- Owners – The owners of the business withdraw more cash out of the business than the business is generating.
- Unplanned or uncontrolled growth – This can be one of the biggest causes of cash flow problems in small business. It results in overtrading, i.e. buying and selling more than the resources of the business can handle.
- Lack of planning – Cash flow is all about timing. If a business is not prepared for large payments it will affect the cash flow.
- Poor quality financial information – The lack of regular financial reports will cause poor decisions to be made.
10. Poor internal controls – Internal controls are procedures to safeguard the business’s assets. For example, no procedure to follow up overdue customers.
Early diagnosis by doctors can save lives. Similarly, early diagnosis of cash flow causes can save your business. Relying solely on the traditional financial statements to ensure a healthy cash flow is not enough. To diagnose the real cause of poor cash flow in your business you will need to go beyond the numbers of the financial statements.
If you have cash flow problems then learn simple strategies that you can start using today that will increase your cash flow and make your business a success by downloading the ebook 10 Cash Flow Strategies for a Successful Business free. Click here to get your copy.
The causes of poor cash flow can be either external or internal factors. The external factors are those that occur outside of the business and its control. While we may not be able to control external factors we can prepare and reduce the risk and impact of them on our business. Internal factors are those that are within the control of our business.
External factors can have a large and frustrating influence on small business and its cash flow. They can also be overlooked by small business as part of the reason for poor cash flow. If overlooked the small business will not be able to effectively improve its cash flow. In this blog I am using a small retail bookshop in the examples.
- Political – The influence on business by government. For example, the government increased the taxes on certain products overnight without warning causing a fall in sales not only of those products but also of other products in the store.
- Economic - The influence of the economy as a whole on the business. For example, a rise in interest rates would always cause a decrease in sales of certain products.
- Social – The influence of demographic composition and social norms. For example, the move to a different shopping centre saw a change in the type of customer even though they were in the same suburb.
- Technological – The influence of progress in technology. For example, the internet enabled previous customers to purchase from overseas the same product at a cheaper price.
- Competitors – The influence that competitors behaviour has on the business. For example, the large department stores started to stock the same items as the shop.
Tomorrow, be sure to return and read about the internal causes of poor cash flow.
Have you downloaded my new ebook: “10 Cash Flow Strtategies for a Successful Business”? Get your copy here today. (Registration required)
Managing your cash flow is one of the most important aspects to running a business. We have seen in the past few years a number of high profile companies that were supposedly profitable go bankrupt.
The cheapest and best source of cash for a business is the efficient management of the cash conversion cycle (or simply the cash cycle). The cash cycle is made up of three core components:
- Stock management (including work in progress)
- Payment of suppliers
- Collection of cash from customers
We need to keep a close eye on these components and the actual cash in the bank. If there are any leakages in these components then we may have additional costs hindering our financial performance. These costs may include extra interest charges for the overdraft, missed opportunities or loss of reputation when not paying creditors promptly.
The cash cycle is the length of time it takes from purchasing your stock till you receive payment from your customer. We can measure this cycle with the following performance indicators:
- Days Inventory – the average number of days your stock is held before being sold.
- Days Receivable – the average number of days to collect cash from your customers.
- Days Payable – the average number of days to pay your suppliers.
The Cash Cycle = Days Inventory + Days Receivable – Days Payable.
Generally, the shorter the number of days the better. However, it is not recommended that you hold off paying suppliers to reduce your cash cycle. The cash cycle needs to be compared to industry norms as well being reviewed for efficiency.
There is an excel spreadsheet available on the resources page of my website that calculates the cash cycle for you.