Poor cash flow is when the incoming cash flow is insufficient to meet the outgoing cash flow needs of your business. We don't have to tell you where the cash comes from or where it is going. Or that cash flow slows down normal operations, future investments and overall growth objectives of your business... it is after all your business we're talking about.
You’re not Forecasting Your Cash Flow
If a business runs out of cash and is not able to obtain new finance, it will become insolvent. It is no excuse for management to claim that they didn’t see a cash flow crisis coming.
So, in business, “cash is king”. Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises. As a result, it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive. A quick update and look at your forecast at minimum once per week WILL pay off.
You Aren’t Creating Revenue Goals
Just getting through today, this week, this month, is often the focus of an entrepreneur. That’s completely understandable and you’re not alone. Not by a long shot. Very few clients we meet has ever set revenue goals in advance. Imaginable, this has a big impact on the decisions you need to make throughout the year not knowing how to stay the course... or even worse! What the actual course is?
This stifles growth and leads to a sense of lacking control.
It is only when you start creating clear revenue goals each year that you are able to create a plan to earn the kind of money you want or need.
You Don’t Know Your Break-Even Point
To be profitable in business, it is important to know what your break-even point is. Your break-even point is the point at which total revenue equals total costs or expenses. At this point, there is no profit or loss - in other words, you 'break even'.
You could be turning over a lot of money, but still be making a loss. Knowing the break-even point is helpful in deciding prices, setting sales budgets and preparing a business plan. The break-even point calculation is a useful tool to analyze critical profit drivers of your business including sales volume, average production costs and average sales price.
By understanding where your break-even point is, you are able to work out:
- how profitable your present product line is
- to which point sales can decline before you start to incur losses
- the amount of units you need to sell before you make a profit
- how reducing price or volume of sales will impact on your profits
- the increase in price or volume of sales you will need to make up for an increase in fixed costs.
You Aren’t Tracking Your Profit Margin
The most common factors our VCFOs encounter when speaking to new clients are:
- They focus on the total value or revenue of a sale but are unclear on the profit margin
- Their sales analysis lacks clarity in which products or services are the most profitable
Many businesses focus too much on revenue and not enough on understanding when the actual cash will land in their bank account and become available for paying expenses.
Do you have enough data to track which projects are profitable and which you should stop selling or when your consultants overspend and kill an otherwise highly profitable project?
Keeping tabs on profit margin on a monthly basis will enable you to make key decisions affecting the operations of your business.
- Do you need to restructure the services you offer?
- Do you need to let certain clients go and focus on more profitable ones?
- Are your internal processes letting you down and allowing regular overspend on services?
Your sales are unpredictably high and low
- you experience bumpy, unpredictable cash flow
- You find it difficult to plan and manage growth
- It’s tough to identify trends and smooth out the growing pains
Again, very few business owners even get around to a sales forecast. Yes, they often have a list of potential deals with a rough idea of which ones will close. To be honest, the issue is not only having a list available, it is that they do not plan out the likelihood of closing the deal. And even more so the timing of the closure!
A much more detailed forecast of your deals, the likelihood they’ll close and, most importantly, when the deals will turn into cash in your account, can fundamentally change your profitability. Once you do this exercise consistently you will be able to have completely different conversations with your team and plan more strategically when you take on new clients. You now know where your slow months are way in advance. You might run into capacity constraints in other months when your team is overloaded due to too much work coming in at once. Knowing what you’re in for ahead of time, helps you prepare to ride out the waves.
You lack a sales process
- You lack the step between goals and the reality or exceeding them
- You don’t have a sales process that will help you reach your goals
- You lack long-term planning and a pragmatic approach to growth
There is no use you have done all the hard work in the steps above for it to only start falling flat now. You have identified your break-even and now know how much money you need each month. This in turn has become your new revenue targets each month. You’ve even identified your possible slow months. It is time to put a predictable sales process in place that brings in the right types of clients at the right times your business needs them.
Without a process, your business is truly at the mercy of the sales gods. A process is always a wonderful enabler for conversation in a business as this will connect the dots for your team members as they can start understanding why they do what they do and what their targets truly mean for the business.
You simply trust your gut
- You’re not considering the driving forces behind your business
- You’re not discussing implications of decisions
- There are no options as plausible solutions available
How do you build a strategic plan for your company if you don’t have certainty about the future? That’s like laying the foundations of your house on a ground that might move or shift in the future.
The reality is that every single decision in your organization is a choice under a degree of uncertainty; In practice, what we end up doing is basing our choices on possible outcomes and best-case predictions about where the future is going to go.
Even worse, poor decisions are often just filed away as the ‘cost of doing business’. Too often though these decisions would be completely different if you had the data at hand and compared your options before you make that critical decision.
Luan van Rhyn is a registered Professional Accountant (SA) and Chief Dreamer and Founder of Calypso Accounting. Luan and his team are passionate about helping SME’s grow and streamline their businesses and are continuously looking for ways to help improve their clients’ bottom line.