Whenever I talk to business owners about monitoring and managing cashflow I typically get push back as many see it as boring compared to the other number they prefer to focus on, profit. If business profitability is all you focus on then you could be in for trouble.
Let me explain by way of a great analogy I heard recently comparing cars and business;
“Speed is to your car as profit is to your business. Fuel is to your car as cashflow is to your business”.
In your car the faster you go the more fuel you burn, and once you run out of fuel everything stops. This also holds true for business also. Fast growth in business will always burn through more cash. For example you need to recruit and train team, bigger/more premises, inventory and the big ‘gotcha’ for many businesses bigger, growing accounts receivable.
I’ve had the pleasure of coaching many businesses through to success. I love it when a clients business takes off and grows as much as 500% in 6 months. However, the most ‘un-fun’ part of the journey is the constant struggle to find enough cash to ‘feed the machine’.
You may have heard the often touted statistic the 80% of businesses close in the first 5 years. From what I’ve seen and studied, many businesses fail not because they weren’t profitable, they simply ran out of cash.
So why is this important right now? For many businesses they have topped up the tank by selling off inventory, using personal savings, owners sacrificing their drawings. Those actions are very short term fixes. It is a survival mentality … trouble is, I think many won’t.
While the current environment is viewed by many as ‘ho-hum’ not great or bad, just ok. There is great opportunity for business growth out there right now by gaining marketshare from competitors, even buying them, introducing new products and services to add additional revenues and profit, etc. However, you can only successfully take on opportunities that exist now and in the next few years if you manage your cashflow to a position to be able to fund it. Due to a cash ‘tightening’ in the marketplace currently, you can’t worry about it later. You need to plan and monitor your cash position both where you are now and where you’ll be in the future.
Actions to take:
- Start your business cashflow spreadsheet(your Fuel Gauge) This will allow you to see how much you have what you’ve already committed to, and see if you have enough to get you to your destination (Yes, you need to have a plan of where you are going, just like a car). See if you can manage some of the biggest ‘fuel suckers’ but reducing them or spacing them out so they don’t all hit at once.
- Many business owners look at their Profit and Loss Statement (the Speedo), however, they rarely look at the Balance Sheet (most of the other gauges) to see where their money is. It also answers the question as to why the profit isn’t in your bank account.