It may start with a small, nagging voice in the back of your mind. You might feel an ongoing tightness in your shoulders and neck. Both symptoms — and many more — are instinctive signals from your subconscious that something’s not right.
How can you know when your cash flow warrants concern? How do you discover where problems lie and determine what you can do about them?
A number of warning signs can help you successfully identify financial issues while they are still small — before they become larger problems. It is important to take these signs seriously instead of letting your passion for what you do lead to denial. If you’re experiencing some of the issues, it’s time to take action now.
- Increasing employee turnover
- Increasing client turnover
- Discounting to create sales
- Paying bills late
- Receiving payments late
- Reaching borrowing limits
- Robbing “Peter” to pay “Paul
- Straying away from your core business in the name of diversification
Too often business owners do not see the connection between these issues and cash flow. Even experienced business owners sometimes forget there are three primary sources to obtain cash for their businesses. Cash can be obtained through:
- Equity – Early cash from equity is often obtained from family, friends and fools. Cash can be obtained by selling a portion of your ownership in the company or bringing on additional owners by diluting your ownership through others. As the business develops, angel investors, venture capital, and private equity can be a source of cash. Each of these parties will seek some form of return on their investment in the company and may have other expectations.
- Debt – Cash can be obtained by borrowing against the value of some or all the business assets, which could include items like accounts receivables, equipment, or real estate. The money borrowed from lenders will need to be repaid over time with interest. Each lender will have varying requirements to ensure timely payment, which may include guaranties.
- Profits – Cash from profits is the primary financial reason why you own and operate your own business and is necessary to be sustainable. Profits are the net result after collecting revenues from your products and services after paying for materials, labor, and other operating costs. The more profitable a business becomes, the greater the ability it has to satisfy the expectations of the owners, lenders, employees, and customers.
Although there are three options to increase cash to solve cash flow problems, the best long-term approach is to increase cash from profits. There are three high level approaches you can take to improve the profitability of your business:
- Reduce Expenses – The first, easiest and most frequently used approach to increasing profits is to cut costs. Although managing expenditures and making sure rising costs do not get out of hand is wise; it is impossible to eliminate all spending without shutting down the business since you will always have some level of material and labor expenses among other needed items to properly run the business.
- Increase Income – The next approach is to increase topline revenue by raising prices or increasing customers. Raising prices can be effective with some research to ensure you are maximizing the amount the market will pay for your products and services, which is heavily dependent on the customer’s perception of value obtained. There is a difference between raising prices and increasing sales volume, so be careful to not just focus on selling more at the wrong price.
- Increase Productivity and Efficiency – This third and critical approach to increasing profitability is the least understood and takes the most effort to implement effectively. The results can become the most beneficial and sustainable. Productivity is related to the level of output or results compared to level of input, time or dollars invested to achieve the desired goal.
Easier said than done? Yes.
It takes a concerted effort to review where you may want to obtain additional cash from – equity, debt, or increased profitability – and then pursuing such course. If equity and debt have already been utilized or not selected, diving into improving profitability through reducing expenses, increasing income, or increasing productivity is the next task. And it does take hard work.
The good news is that, while you’re making these short-term improvements, you’re also adding to the value of your business.