Should you improve Cashflow or Profits?
This is a question I get asked very often and the answer is not always straight forward as they both matter. However sometimes one matters more than the other..
We’ve had a recession forced upon us in recent times and this has caused many businesses to suffer greatly and if not, destroy them altogether
With this in mind I want to support your requirements in managing your cashflow and what drivers you can absolutely control and therefore improving it. I can’t stress the importance of small business cashflow management
Regardless of economic climate, this is something you should, as a business, work on all the time as there always will be something you can influence.. There is an old saying, look after the pennies and pounds will look after themselves, this absolutely holds true when it comes to cashflow! Cashflow is the lifeblood of your business no matter what’s happening in the macro economic climate, so never take your eyes off it.
When I’m working on cashflow projects, there are 8 levers that I assess the business against, which you will learn about in the video, however don’t just stop there, always question what other levers you may have or even sub divide the levers I’ve called out if some of them are too broad for a specific area of your business. See once you call them out, then you can start creating plans and activities to do something about them, that is, assess where you and set targets for where you would like to be..
An important point to note here is that there is no one size fits all approach to this as your business model on the ground will be different than the business next door, so start working with the levers you believe will deliver the most effective results in the shortest possible time. It’s your business, so be smart at all times.
Economies will always through curve balls at you, and this particular recession has been completely unprecedented, if you have survived it, I salute you! With that, take heed of what you’ve learnt from it, look at what in your business you can do to protect it and mitigate any risk driven by external factors so the next time something like this happens you know you have a solid platform to work with.
Video transcript
Hi it’s Shay Lynch here
Director of Future State
and today’s topic is cashflow.
Now I’m bringing up cashflow
I’ve talked about it many times before
why am I talking about it now is well
we’re going through very
very uncertain times
at this moment and while we cannot control
the macroeconomic climate
I wanna help you work on
the things you can control
in your business today
and that is your cashflow.
And I wanna talk about the
difference between cashflow
and profits because
again many many companies
talk about profits.
Like when I see their books the profits
everything looks good on paper.
But how does that transpire
into the business itself
the working mechanisms
the daytoday operations
and so forth?
Because profits are good on paper
cashflow decides the
success of your business
on a daytoday basis so
it’s extremely important
to know the difference
between cashflow and profit.
Profit is great when you’re
looking for investment
when you’re looking to talk about
how you’re gonna scale your business
if you’re talking to investors
and they can see well you know what?
This business is viable
this can make profit
we can help this business
and we can all win
we can all benefit right?
But if you wanna survive daytoday
you have to make sure your
cashflow cycle is in control
to the best of your ability right?
So with that you will see
here what I wanna show you here
is like this little box here is all about
well the green is all the cash coming
into your business right?
But as you make your
payments to your salaries
your staff your wages utility bills
revenue charges loan
repayments or whatever
all the different cash out.
By the time this happens on
say you’re talking about
a month to month basis
your net profits are
being eaten away right?
So with that unless you know things
are always gonna get tighter
cost of logistics the cost of fuel
the cost of everything
goes up which squeezes
and squeezes your net profit all the time.
So it’s very important you make sure
that this is positive not negative
and that’s where managing your cash flow
is extremely important.
And it could mean the
difference of your being
just striving along working daytoday
or absolutely thriving right?
So with that and again also to ensure
when you are in difficult time
that you have a business
model that you know
is gonna give you the best ability
and potential to get out of it right?
So with that I want to talk
about a number of levers.
So when I work with my customers
it’s usually about eight
levers that I work with.
Now some of them are on the sales side
some are on the inside
of your business right?
So I divided into two
like the sales side right?
There is four levers you can work with
which are customers right?
First of all sales price.
Now I’ve talked about this before.
Now can you increase your sales price?
Now say for example if
you want to increase
your sales price by % by
addingto % more value.
Is that lever available to your business?
So I would ask you to check
look at your customers
look at your marketplace see
what everyone else is doing
and see is there potential
to improve that sales price?
Cost of sales.
And again we’ve talked this
in detail in another video
right cost of sales.
Like I’ve also worked
many sales environments
where I managed and projected
the cost of sales right
broke it down and I’ve seen that %
of the sales process
doesn’t lead to a cent.
And of that % only % has actually led
to a profitable sale % were not.
So managing your cost of sales is huge.
all the way through your funnel.
Don’t be chasing leads
for the sake of them.
Only chase high potential
leads and ensuring
that everything you do is giving you
the best chance of getting to a sale.
This is huge this is absolutely huge
in terms of your cost of marketing
in terms of lead generation
there are so many
things you can do in your cost of sales
and again we’ve talked about
this in a previous video.
Obviously the obvious one is improving
your volume of sales.
And again it ties into the process
of your systematic sales and again
we’ve talked about this in detail before.
But how do you become more effective
at every stage of the funnel to ensure
your conversions are going
up and you’re better serving
your customers all the time.
‘Cause it is all about service delivery
not necessarily just
about increasing sales.
You have to increase the
value to your customers.
And then obviously sales
payment the cash cycle
with your customers and
you get revenue coming in.
This is extremely important.
This alone can make or break your business
so it’s important to have
a very systematic approach
to receiving payments from your customers.
Now how do I do that?
Well there’s a number of different ways.
It depends on your
marketplace it depends on
what is the norm in terms
of the sector you work in
but usually that involves
breaking your payments
down into stage payments right?
And they’re usually front loads
and only leaving a little
bit out at the end.
Because what happens
if you do all your work
then you don’t get paid for it.
You’ve wasted a lot of time.
You haven’t got the value to show
’cause you haven’t done the revenue.
So it’s very important
to agree stage payments
with your customers.
That is fair it has to
work for them as well
as it has to work for you.
So it’s extremely important
to control all those levers
on the sales side.
You systematically work through these
straightaway you’ve made
an improvement right?
Now on the internal side
operational efficiency.
Again this is huge.
We’ve talked about this in detail before.
But it’s all about
streamlining the value process
in your business.
Everything that leads to service delivery
from your customer’s perspective right?
Improving the value
reducing the nonvalue
and the net result of that is
you’ve got a time for service
delivery or production
then when you deliver to your customers
you’ve another time on top of that
where you invoice and then get paid.
This is all about reducing your production
or service cycle so then
you can invoice quicker
you can get paid quicker.
And again this absolutely ties in
to this payment process right here.
When you reduce that cycle alone
you get paid quicker.
You improve your cash flow straightaway.
This is huge.
You know when you do
this and only with this
this will also improve your profits
because you reduce your cost of operations
therefore you increase your net profits
again protecting that one
right there all right?
So we’ve talked about
that in detail before
so I suggest to look
at the previous videos
that I’ve done in this area.
And then if you have suppliers
whether they component suppliers
or contractors to execute delivery
there’s a number of different levers
that you can work with them.
Again if it’s inventory reduce the amount
of components and stock
that you have inhouse.
Use can bands to signal when you need
new components brought in.
Get less of more often
so you’ve straightaway
freed up a lot of cash just there.
Not only in the cost of having them
but the cost of storing them
and insurance costs that goes with it.
There’s huge savings to be made here.
Now obviously if you’re getting inventory
from are off field from
different continents
you have to be very
careful with this as well.
And this could be just as simple as
having your partners in
these different continents
having a finite amount of finished goods
so you don’t have to worry
about their production cycle
you just have to get them shipped to you
in that cycle as well.
So lots of stuff can be done there.
And again creditors
developing winwin credit terms
with your suppliers that
works for them works for you.
Obviously the nice one for you is
you only pay them when you get paid.
It doesn’t always work as clean as that.
But work together to make it better
so it works for both parties.
You’re in this process together.
So find out where is the sweet spot
about these credit terms.
And yes keep it as close
to when you get paid
from your customers to pay them.
That means you’re in a positive
cash cycle all the time.
And then finally what you’re doing here
support your suppliers
doing those activities well.
You will never understand or appreciate
what you can do by helping your suppliers
until you actually go and do it.
Replicate what you’re
doing there with them.
And that could look in
many different guises.
It could be simplifying your components.
It could be helping them
with their suppliers
raw material suppliers or it could be
talking about their
operational efficiencies.
So work with them this huge
if your suppliers are a big part
of your cost and your business
work very very closely with them.
And once you start if you
focus on a little bit here
all the way through these
four levers and these
they will accumulate to
quite a substantial savings
in your cash flow.
This makes a huge
difference little in a lot
of areas accumulates
to quite a substantial.
So create a plan and
systematically work through
every single one of these.
Now I’ve put down eight levers here.
Usually you can work very
well between four to six.
You know stretch it as best you can
because the more you
can improve these areas
the better your cash cycle will be.
And this will also then
support your net profits
and then make your business more viable
so when things do get
tight you can go to a bank
and say look we just
need a shortterm loan
to get through this difficult time
but you can see our business
is absolutely viable.
So this supports working with banks
and it also supports if
you wanna get an injection
you want to scale your business
this will absolutely
support anything you do
to get investment in.
So over to you.
What are you gonna do now to
improve your cash flow cycle
in your business?
This is Shay Lynch saying
thanks for listening.
(upbeat music)
