October 22nd, 2019 David Finkel (Taxloopholes.com Advisor)
Every business owner has experienced cash flow problems at one time or another, and the gut reaction for most entrepreneurs is to immediately ramp up their sales efforts in an attempt to turn the tap back on and get cash flowing again.
This instinct however is counter productive.
In fact, in most cases ramping up your sales efforts will only exacerbate the problem and cause you further financial strain in the short term. If you truly want to fix your cash flow problems for good, you need to address these three root causes for concern.
After 25 years in business, I can say with certainty that no one likes collections. Most business owners will go to great lengths to ignore this vital task simply because they are uncomfortable asking clients for the money that they are owed.
Your comfort level however won’t help you pay the bills. Remember, once you make a sale you are then responsible for the cost of goods associated with that sale. You have to pay your vendors and employees in a timely manner, regardless of whether or not you have collected the revenue from your client. So every day that they are behind on payment, you are actually worse off than had you not made the sale in the first place.
So, if you continue to ramp up sales without timely payments, your cost of goods will increase with little to no money coming in to cover those bills.
The second issue that most business owners need to address when looking at cash flow issues has to do with pricing. When was the last time that you looked at your pricing and profit margins? Most business owners set their pricing in the early stages when they are new and desperate for clients, which means that nine times out of ten their pricing is too low.
As the business grows, so does your overhead but many owners never stop and look at their pricing structure from year to year. So, you may be spending a great deal of time and effort to increase sales when what you really need to do is increase profits.
This can happen to anyone. For example, I was coaching a CPA firm in Mississippi that was struggling with cash flow. We did a “margin analysis” breaking down their gross profit margin on every client and discovered something. One third of their clients, which we put in to “Bucket A” were high margin clients. One third of their clients (Bucket B) were low margin clients. And the final third of their clients were negative margin clients (Bucket C) which meant they were losing money on every sale they made to these Bucket C clients!
We immediately raised pricing on all Bucket C clients or gently guided them to other firms. Next, we went back to the Bucket B clients and both raised pricing and looked at ways to reduce the production cost to do the service work, both of which improved their margins.
The last thing you need to look at when fixing cash flow issues has to do with overhead. In the early days, you were able to keep tabs on every dollar spent within the business. But as you grow, you have the tendency to lose sight of the details.
Go through you P&L statement and question every expense, especially the big three: staffing, capital expenditures (e.g. equipment and plant), and office costs. Can you make any cuts? How about negotiate with your vendors for better pricing? Can you make a fixed expense variable (e.g. paying a performance fee vs a salary, locking in an option to renew versus an obligation, etc.)?
After you have addressed these 3 problem areas, you can then go with your gut and work on increasing your sales volume. The results will speak for themselves!