So what does Bob Barker and the Price is Right have to do with your service business? The Price is Right in 2007 was named the greatest game show of all time by TV Guide. Bob Barker was the host of the show from 1972-2007, making it the longest-running daytime game show in North American television history.
If you are interested in building a great business you need to be in it for the long haul. You need to be willing to out-live your competition. You need to be interested in being the longest-running service business in your area. In order to successfully accomplish this, in order to become the “Price is Right” of your industry you need to be focused on the key factors that will get you there. The one factor that will help you accomplish this more than any other financial factor is Cash Flow.
Step 1. Understanding cash flow
Let’s begin with a definition: “Cash flow is the ebb and flow of cash in your business.”
Or, here is another one: “Cash flow is the flow of money (cash, checks, electronic debits and credits) in and out of your business.”
Cash flow is an overview of your check book, savings account, and investment account. However, knowledge of those accounts won’t:
Tell you where your cash is heading.
Help you to arrive at any meaningful decisions.
Cash is, “what you take home.” In the interest of emphasizing how important cash is (as opposed to profitability), let’s put that statement another way:
“If you don’t have any profitability you won’t have to pay your taxes. If you don’t have any cash, you can’t pay your taxes.”
“Profitability” is an accounting term of special interest to people who collect your taxes, while “cash” is the money that resides in your cash register and in your checking, savings and investment accounts. Cash flow measures the ebb and flow of that money, the successful measurement and forecasting of which allows the small business owner to make a myriad of important decisions.
Decisions such as:
Do I buy a new computer or software system?
Do I purchase or lease that delivery van?
Do I hire that new salesperson?
Do I bring in extra inventory?
Can I afford to give my special customer an extra 30 days to pay his bill?
3 Factors that affect your cash flow
The purchase of Inventory requires an outlay of cash, but that outlay does not appear on the P & L. This is because inventory is an asset, similar to cash, accounts receivable and FF&E, and only appears on your Balance Sheet. A build-up of inventory requires an expenditure of cash. If your inventory has increased in the past month (or whatever your financial statement cycle is), then your cash has decreased by a like amount. The opposite is also true: If your inventory decreases your cash will increase.
Accounts Receivable (AR) is basically cash you have loaned to your customers between the time they receive your products or services and the time they pay their bills. It takes cash to fund those receivables, which means that if the amount of your receivables has increased from one financial statement cycle to the next; your cash has decreased by a like amount.
- Furniture, Fixtures and Equipment:
Cash spent on FF&E amounts to expenditures for capital goods. Because capital goods have an extended life (as opposed to supplies, for instance, which are generally consumed within a year) they cannot be 100% expensed on your P & L. The amount that can be expensed is called “depreciation” and that amount is determined by various taxing agency regulations.
This means that if you were to purchase a capital item for $20,000 on the first day of your accounting cycle, this would have a negative effect on your cash of $20,000. However, it would only have a $5,000 negative effect on your profitability, assuming that it can be depreciated over four years. This $5,000 shows up as “Depreciation Expense” on your P & L, while $20,000 is deducted from your check book. This is a classic example of the difference between profitability and cash flow.
Below you will see a list of strategies that you can do today to help you prepare a plan of action for improving your cash flow situation. If Cash flow is CRITICAL than ACT NOW.
Calculate breakeven points for business and all sales people
Reduce non-income generating expenses by 10%
Review wages as a percentage of sales. If appropriate move people from salaries to performance based pay
Increase conversion rate by training the team in sales
Set a target for increasing your average $ sale and then put in place 5 strategies to help increase it
Ask for help
From suppliers- would they accept a payment arrangement for next 6 months
From team- explain the situation to them and ask for them to rally around and put in 110% effort. Ask for commitment from them to increase productivity and reduce expenses.
Put your tax bills on a payment plan. Much better to be paying a little bit off than nothing and getting a “please explain letter”
From bank manager -consolidate loans including credit cards to reduce interest payment
Reduce all debtors starting with any over 60 days
Reduce owners drawings to minimum amount.
Organize a sale to move slow-moving or outdated stock
Upsell or Cross Sell
Sell like crazy
Set short-term (90 day) sales goals and get by in from the whole team
Sell unwanted assets
Understand Cash Gap concept
Calculate gross profit margin on everything you sell and then focus on the items which are bringing in the most total profit (volume x margin)
Categorise customers into “ABCD”. Focus on the profitable A’s and B’s with your advertising.
Just remember that you are not the first person to experience tight cashflow in business and you definitely won’t be the last.
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