When times are good and cash is plenty, is hard to know or even care, if you have good financial control. The impact of the lack of financial control will often rear its head when times are hard so ensure you can recognise the signs before it does damage to your business.
- You have that sick feeling in the pit of your stomach every time you go to look at your bank statement. You’ve no idea what money you have in the bank and worst still how much you will have in the bank next week.
What to do?
Build a cash flow forecast. It may not be great news but at least you know where you are heading. Once you know, you can make plans around what you can do about it. Often just having some line of sight gives you the ability to be able to plan forward. If you remain in the dark, it is not only stressful but will stop you from making a whole load of good decision you need to be making.
Your cash flow forecast should be projected forward weekly and be dynamic enough so that you can change and rephase your costs before they are spent. This will give you the best chance of moving forward to a better financial position. Use an excel spreadsheet as this is the most versatile and flexible way to be able to plan your future income and cost streams for your business.
- Your employees seem to be better off than you are.
What to do?
This maybe because your personal expenditure is misaligned to your business finances. It is important to understand how much you need to invest in your business. Don’t drain your business with excessive drawings for your personal needs. Draw up a personal survival budget and make a plan to reduce your debt and consumable spending. Knowing how much your business needs to provide you personally is a powerful figure. You can use this to ensure you only take from your business the right level of drawings which are sustainable by your business, at this point in its lifecycle.
As your business grows, you should be able to phase up your drawings but getting the balance correct now, will ensure you win both via your business growing and via an increase in your personal drawings.
- Your interest payments are so large you struggle to make the minimum payment each month
What to do?
Look at all your debt, both business and personal. Try to consolidate to reduce the overall average interest rate. E.g if you have equity in a property and high credit card debt, you may be able to increase your mortgage and use the cash to pay down the credit card debt. Likewise, can you raise equity funding for your business and reduce the amount of higher interest debt in your business? Alternatively, is it worthwhile raising longer term funding to substitute short term more expensive funding. If you have a cash flow forecast as in point one above, you will be able to plot in your new figures to see if this is workable.
- You have no idea what you are spending your money on.
What to do?
Take control and log all your expenses. It may feel cumbersome but in the longer term you will begin to understand where you are throwing your money away. It is often a number of smaller items that add up to a larger amount. When you look at these costs over a period of time, instead of in isolation you begin to see the true magnitude of the spend.
Being able to categorise your spend will also help you with your decision making. If you know that you have 40% of costs which are discretionary and hence can be rescoped, postponed or just cancelled, this will enable you to take a decision on when and how you spend your money. Discretionary costs are such things as travel, entertainment, meeting costs, consultancy, etc.
- You never seem to have more cash even though your sales are increasing.
What to do?
If you feel your business is living hand to mouth this may mean you are investing in growth but the required level of growth is not materialising.
Make sure you measure the payback on each item of investment you make in growth. This may be in terms of a new resource or money spent on a campaign of marketing. If you don’t get sufficient payback within 3 months ( or whatever you feel is a reasonable amount of time) kill it. Payback means that if you spend say £3000 on additional resources to increase sales, at what point would you expect this resource to cover it costs. Employing a telemarketer at a cost of £1000 per month would require by say month 3, to have generated sufficient sales (and bottom line profit of £3,000) to cover their costs of £3000.
You can learn more about measuring payback in my article here.
- You have been injecting your own personal savings into the business and there is still no improvement.
What to do?
Check your business model and see whether it is still profitable. Price changes, higher overheads and excessive or uncontrolled costs can quickly turn a profitable business model into a loss making entity. When your business is growing it is very easy to lose sight of your cost base and how this relates to your sale. I always recommend that you have a clear idea of what your Gross margin/sales % is and what your net profit/sales % is. Being able to calculate these ratios will enable you to keep a close check on how your cost base is moving as your sales moves. Only a few months of working at a loss can severely damage any reserves you have built up. Protect any reserves you have by having this important flag in place to immediately warn you when you are going off track.
Contact me for a friendly chat about your business today.
If you found this article useful and you would like more detail around all the points above, check out my new Ecourse by clicking below.
This includes my own premade cash flow templates to help you with planning and forecasting your personal and business spend.