10 cashflow sins and how to avoid them
By Paul Roach
Navigating COVID and the aftermath is an unprecedented challenge for businesses and business owners globally. What was a well-run business pre-pandemic may now well be facing an uncertain future or fast-tracked into oblivion. The rules have changed, but the game of business has not. Where it was difficult enough before, now the challenge is potentially harder. Tougher challenges require a different type of thinking. There is less room for error.
At a time when stress levels are at an all-time high, we need to do our best thinking and planning. This requires us to be at our most calm, thoughtful, and 100% on the ball. Where we have previously travelled on a set pathway, we now may need a significant change of direction. New skills, new ways of doing things, and more demands on us than ever before.
Revenue is Vanity, Profit is Sanity, but Cash is King. Whilst the marketplace has changed, the fundamentals have not. The Game of Business has always had a fundamental rule—never run out of cash. Here are the ‘Top 10 Cashflow Sins’ and how to avoid them to help keep cashflow in your business.
Nothing to Learn Here
When your business is small, and you can have a fairly good handle on cash inflows and outflows. It is all manageable. However, running a business is more like sailing a yacht. As the owner, you need the knowledge on how to tack when the wind changes direction and you are trying to sail forward. You need a map and compass to guide where you are going, warn you of reefs and sandbars, keep you away from the shoreline and guide you to calm waters when storms are approaching. If you only ever have skills to handle calm waters, then turbulence can send you under. Learning the rules of cashflow and how to avoid unexpected turbulence to stay afloat is one of the most critical skills to master in your business.
Business is not Personal & Vice Versa
A significant number of business owners have drawn a very poor line between business and personal finances. In many situations, they have not controlled the amount of money they take out of the business or ensured that they paid the appropriate amount of tax. If an owner can freely put his hand into the business bank account, there is every chance he is going to take more than what he believes he is taking. It may well be his business and ultimately his money, but if this is happening in an uncontrolled fashion, it can put a strain on the business cashflow.
I have made some Profit; Can I take the Cash?
Making profit in your profit and loss may not be an indicator that you have available cashflow to spend. Understanding that cashflow can hide in many places in your business and it is your job, as a business owner, to make sure it is freed up so as not to hamper the business moving forward.
Many business owners have found out the hard way that their businesses’ bank balance is not an indicator of what funds you have available to spend in the business. In fact, it is a lag indicator. This means there may well be payments needing to be made for purchases, payroll, or other liabilities before funds are available to either the owner or for the business to use elsewhere. Business payment cycles are often lumpy with, for example, some tax obligations due quarterly for many businesses. Planning and allowing for these requires a cashflow forecast and for it to be updated at least weekly.
No Plan = No Cashflow
Having good cashflow requires planning for it. This includes setting your business up for success from Day One. Factors that help your business be successful include making sure your sales to cash receipt cycle is fast and you review any outstanding debts regularly. Keep the cashflow coming in. Set up some extra bank accounts to transfer funds into for known cashflow items like PAYGWH, Staff Superannuation, and GST. Transfer the amounts across when each payroll is processed for the first two and at the end of each month for the GST.
Discount your Cashflow to Disaster
Reviewing and updating pricing regularly is part of the role of a business owner. Minimising discounting and reviewing the level of discounting consistently requires effort and the right cashflow mindset. Keeping a keen focus on market changes and competitor positioning will help maximise each opportunity. Businesses regularly leave historical discounting in place even though circumstances have changed.
Keeping it Lean but not Mean
What we are looking for is just like a good bit of steak: all meat and no fat. We want to keep overhead costs tight, but not stupidly so. There is a balance between necessities and luxuries. There is a fine line between the level of overhead you need to keep the business operational and have some capacity for growth versus running it too tight.
Doing Stupid when Stressed
When was the last time you looked at your business with fresh eyes to see where the opportunities are? Take the time to have a good look at your business with a keen eye on future potential in the marketplace.
It is unlikely that you can achieve this sitting inside the four walls of your business. You may need to be outside, in a different place (cafe, beach, local park) and it may take some time to switch off the “noise”, de-stress and think clearly to focus on the future.
Loosing Margin and Profitability
Now more so than ever, cost structures are changing. Some industries are seeing significant and continuous price rises on cost of goods. Keep focused, be vigilant, and be careful. Your business needs to keep its margins to trade through this turmoil profitably. Stay focused on upside potential.
Drive your Business, but know your Cashflow Breakeven
Now is the time to go through your numbers, preferably by hand! When you write your numbers down on paper, you gain a real cognitive learning experience and a better understanding of exactly where your cashflow breakeven point is!
Tight Times call for Different Thinking
The current marketplace has undoubtedly created opportunity for some, much the same for others, and really tough times for many. There will continue to be a long list of businesses that are unfortunately unable to make it through to the other side.
Is there cash hiding in your business that can be freed up to be utilised now? Cashflow often hides in debtors, sits in your warehouse as inventory, occupies a parking bay as an unused vehicle, or on site as surplus plant and equipment.
Does your business have available finance it can use if needed? Are you able to pay down any loans or credit cards if you have surplus cashflow?
Is your business making it easy for others to do business with you? What do your customers need? Credit card payment options? Buy now, pay later solutions? Now is not the time to be shy or to hold the belief that these are not for you if your business qualifies.
Paul Roach is a sought-after business strategist and coach who has worked with hundreds of SMEs across many industries to supercharge their cashflow. As a CPA qualified accountant and serial business owner himself, Paul is perfectly placed to educate, train, and develop businesses in the vital area of cashflow. Smarter Business Stronger Cashflow is Paul’s first book. Visit www.thecashflowcoach.global