Many business owners, after running their business for a few years, end up feeling frustrated and burned out. Do you feel that you are forever having to work harder and harder in your business but with no feeling of having more cash in your pocket!
An awareness of how your actions and decisions are impacting your cash and profit figures differently will give you more insight and less frustration with your situation.
So, here are 3 of the common reasons why this could be happening and some suggestions on how to manage this.
- You are spending on growth and you are not yet seeing any pay back.
Inevitably, when you invest in your business in order generate more income into your business, you will need to pay out on increasing overheads. Overheads are fixed costs which tend to not be directly linked to income generation. Although we spend on these areas in the belief they will eventually lead to increased sales, there is often no absolute certainty and quantifiable result. Money spent on these areas will hopefully lead to increased sales. Being able to track a direct relationship and plot a timeline is difficult. This includes categories of costs like Marketing, support staff, and some sales and admin activities.
These overhead will load up your business with costs that are not yet being matched with increasing sales. There is always a lag between investing in resources to support growth and the sales materialising. This time lag means that for a period of time, you will be eating into your cash reserves.
You may also be spending money on enhancements like new computer equipment, new web sites or new plant and machinery to increase your capacity. These costs are typically not shown as the full amount in your profit and loss account. Hence they do not impact your annual profit figure. They’re categorised as a cost for long term benefit. These are referred to as Asset costs and these are shown on a different report called your balance sheet. Cash wise of course the cash is spent when you pay for it and hence this will directly impact on your bank balance, showing a reduction in your cash reserves. Your profit and loss report will not capture the full amount of the cost in the current year so will show a better picture of performance.
Be mindful of your capital spend and try to ensure you have a good realistic cash flow forecast in place which measures where and when you expect these investments to payback in terms of sale figure uplifts. Tracking these costs will ensure you don’t eat into your reserve funds and over spend.
- You are giving all your profit away to the overhead areas of your business.
As your business grows there will be areas of your business where you must ensure that these costs do not simple rise in direct proportion to your sales figures. Overheads by their very nature are costs that are prone to step change. Think about when you take on a new member of staff. Until you are fully utilising their hours it may be worth using a subcontractor who can work to a flexible number of hours, rather than seeking a fulltime employee. Examples would be where you use a subcontracted project type resource to help with the implementation of a new software system. After this implementation has been done, there is no longer a need for this resource so they can be released.
By growing your business with some level of cost awareness, you need to try to see where you can take advantage of your economies of scale and allow more of the additional sales revenue to drop straight down into your profits. For example, the costs of employing a receptionist for attending to the reception desk between 8am and 5pm will not change regardless of whether the business is selling £100K or £1m. Are you capturing the instances of this and ensuring the support areas are not growing unnecessarily? Many resource processing areas will grow in proportion if a culture of continuous and process improvement is not nurtured. This means that these resources must be targeted to achieve more processing with the same level of hours. Common areas which will need to be targeted are Finance, admin, HR and support areas to your main operations.
- Your costs structure is no longer efficient for the size of your business.
Although your business is showing a profit, due to the inefficiency of your cost base these profits are being reduced and hence less amount of profit per £ of sales revenue is being returned to you.
As your business grows it is important to constantly review your direct costs base and specifically in terms of those costs which vary directly as your sales figure changes. For example, when your business is smaller it is often more efficient to subcontract out any excess work rather than pay and have to employ a full time resource. There will however come a time where it is more cost efficient and also productive to review these resources and see if it is more efficient to now bring these in house. Doing an in-house versus subcontracted costs analysis is a good piece of work to do in order to evaluate which is the best solution. When looking at subcontracted labour which you use to help complete and fulfil your orders, these resources can be used on an hourly rate and it means they do give you some level of flexibility on when you use them. You only pay for the hours you use. The hourly rate although it is often much more expensive than an in house resource, the quantity of hours you use makes the overall cost cheaper. However, past a certain level of hours this cost is far too expensive. You need to know what this level is and ensure you check and monitor this to ensure this cost does not overly reduce your margin. Don’t forget increased sales will also put a strain on existing in house resources so the decision should be taken on whether the outsourced option is viable or is it better to grow slower and invest in in house resourcing instead? The hourly rate theme can also extend to any type of direct cost you incur. For example, a start-up beauty therapist rents a room in a bigger clinic and shares the receptionist and amenities based on an hourly rate. She needs to know at what point paying on an hourly basis is more expensive than leasing her own space and using her own resources.
So there we have 3 areas I recommend that you keep reviewing as your business grows. These 3 areas describe why you may be feeling that your profits are increasing but you actually feel you have less cash.
Constantly reviewing costs will ensure that as your business grows you keep building the amount of available cash. Cash that can find its way back to you as the business owner.
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