Having an intimate understanding of Cashflow and Financial Management is imperative to know that you’ve got a business that can produce profit and withstand whatever comes your way.
Time To Break It Down…
How do you know that you are truly a master at cashflow and financial management?
There are three key pieces to this:
1 - Ensure that you’re priced correctly for growth and profit.
First off, get a copy of the book Profit First by Mike Michalowicz. Mike’s book makes it easy to understand pricing for profit, what margins to maintain, and how to get there! If you’ve been following me for any length of time you know that it’s my go-to book for recommendations. In fact, I mandate that all of my one-on-one clients read it.
Without a thorough understanding of how to create profit in a business from the get-go, you’re screwed. You need to be able to subtract profit, taxes, and marketing or sales commissions and still have enough money left over to pay someone a reasonable wage for the hours required to fulfill on that sales. Additionally, you need some left over to cover your overhead (including rent, electrics, supplies, software, etc).
Profit First goes deep on explaining why & how. Get it!
Until you understand this, you'll set yourself up with a business that will never actually scale because you can't afford to pay someone else to do the work.
Start your path to cashflow & financial stability by checking your pricing. The rest of this won’t make sense without it!
2 - Understand how to play the cashflow game. (With sub-points included!)
Don't keep massive lumps of cash in any one account - especially not your operating account.
When we have massive lumps of cash in that operating account, it's too easy to spend. We see that chunk of cash and say “I can drop this here,” or “invest in that” and suddenly there’s no money left to pay payroll at the end of the month again, much less profit or taxes!
Mike recommends having a profit account, a tax account, an expenses, and as many accounts as you need to make it easy to understand what money is going where and why that chunk of change shouldn’t be spent on that shiny object.
Properly leverage your credit cards and lines of credit.
Before we start:
Do NOT spend money you don’t have!
Whatever you put on your credit cards or on your lines of credit should be able to be paid off on the next billing cycle. It’s not worth the interest and risking building massive debt that will cripple your business.
Credit cards and lines of credit are great because they give you 30-45 days to pay off the expense, receive cash-back points, and keep the cash in your account or receive payment from a customer for the expense you generated on their behalf. This can allow you to make an upfront investment to take advantage of an opportunity you couldn’t have otherwise.
I also use credit cards for a variation on Mike’s Profit First concept of having an individual account just for expenses. It makes it easier for me to see how much money is spent on marketing and contractors and subscriptions if each expense has its own credit card.
As an added bonus, it requires a conscious acknowledgement of the expenses generated every month when I pay off a five-figure credit card bill versus having multiple negligible three or four figure withdrawals throughout the month!
Caveat: Be smart. Avoid taking on massive debt for “maybe” opportunities. And if you don’t have the control to only spend money on things you can pay off right away, don’t use credit cards.
Negotiating shorter payment terms for your clients whenever possible.
You want to receive payment as quickly as possible for service rendered. For recurring clients, get a card-on-file, have them pay up-front or upon delivery of the service/product whenever possible. For one-off clients, still require a card-on-file or take payment at time of service.
Remember, they are playing the cashflow game too. They will try and push paying you out as long as you’ll let them. You’re not a bank. Don’t loan your clients money by letting them push for 30-120-day terms!
Negotiating longer payment terms for your vendors.
Remember, you’re playing the cashflow game too! It never hurts to ask for different payment terms for the people you’re paying. See if they will agree to a 60-day turnaround period to give you additional time to collect from your clients. This way you’re bringing in cash quicker than you’re having to pay it out. You also decrease the chance of you sitting with an invoice due and no cash to pay it because a client hasn’t paid you!
Let’s be realistic! You can’t always negotiate on payment terms. Sometimes, especially when dealing with a large organization, they pay when they pay. But it doesn’t hurt to ask! Just ask confidently.
Invoice and collect promptly.
Do not wait around to invoice your clients! Get the invoice out asap and collect on it as soon as it’s due. The quicker you are to invoice and follow up, the more emphasis your client will put on paying you on time. Some business owners wait to invoice because they feel like it’s a “rainy day fund” if their clients owe them money.
If that’s you, you’re better off getting a separate bank account, collecting quickly and keeping your rainy-day-fund under your control. Trust me! Your customers are doing the same thing and when you need the cash most, you won’t be able to get it out of them quick enough. Especially if you’ve been lackadaisical on collections. They won’t understand the sudden change and the relationship will crack.
Understand how to read your financials.
3 - Get your financials on a monthly basis.
There are three financial statements you need to receive every month for the previous month:
The Profit & Loss Statement
The Statement of Cashflow
The Balance Sheet
If you don’t understand what information these three sheets give you, start with some google searches, take a couple classes online, or ask your accountant or bookkeeper to walk you through them three or four or ten times! If your accountant makes you feel stupid for asking, get a new accountant. They shouldn’t be trying to hide information from you. They should be an asset on your management team. Understanding the basics of your financials is non-negotiable and a skill you need to develop as a business owner.
Know what ratios to track.
Instead of just glancing at the topline revenue and the bottom net profit on your Profit & Loss statement, run a couple quick ratios & watch for percentages that are ballooning past acceptable levels.
Compare the % of your revenue that goes to expenses versus cost of goods sold, or monitor specific expenses that have a tendency to get too large. I personally review what % of the revenue goes to software and subscriptions monthly. If it gets too large, it’s a sure sign I need to jump in and review our subscriptions and possibly eliminate or consolidate some we aren’t using!
Ratio tracking enables you to know what revenue is going where, and gives you the opportunity to look at just a few numbers to know what minor corrections need to be made on next month’s finances.
Track your KPIs!
Your KPIs are your Key Performance Indicators.
I also use my financials to track KPIs.
Financial KPIs may include Debt-Income Ratios, Profit %s, Cash Totals, Revenue Totals. By choosing which KPIs I need to track in a spreadsheet each month, I can get an at-a-glance 30,000 foot view of the business and if things are moving the right direction, or not. Again, this allows me to make minor course corrections before the business reaches critical points.
To Sum Up…
Make sure you’re pricing for profit, you understand and are playing the cashflow game, and can read your financials and know what key points to look for.
Afterall, cashflow is still king in business!
If you’re looking to make real changes and create a business that is stable and built on a foundation to outlast whatever storms come your way, check out the Disruptive Business Accelerator! Our current group is making leaps and bounds in their businesses, and you don’t want to miss signing up for the Fall Session that guarantees to take your business past the $250K Revenue Glass Ceiling.
About the Author:
Stephanie Scheller is a TED speaker, a two-time best-selling author and the founder of Grow Disrupt: a San Antonio based company dedicated to disrupting the way the world does business through training. In just under a decade, Stephanie has been behind the scenes with nearly 2500 small businesses. She has worked in groups and one-on-one to create total business transformation & help business owners live the life they got into business to create!