In my work with clients, I frequently hear some variation of “I’m working way too hard for too little money.” Most of our clients are long past start up, so the speaker is often someone who’s running a well-established business. The type of company that outsiders perceive as successful, stable, making it. But when I peek under the hood, I discover this mature business is gasping for air. More accurately, it’s gasping for cash, which might as well be the same thing for a business.
Most of my clients want to solve this cash crunch by increasing sales. More must be better. But what if the problem lies elsewhere? More sales might actually make the problem worse. You know the old punch line, “Yeah, but we’ll make it up in volume.” What’s required is the proper diagnosis, so the correct remedy can be prescribed. As my dad would’ve said, “The proper tool for the proper job.”
I’ve encountered three common cash culprits that often lie hidden to the small business owner. Three common small business problems that once identified and addressed, positively impact cash. The remedies are simple but typically invisible to the business owner. Positive cash flow is sitting there waiting to be unleashed with fairly straightforward measures. Similar to how the oil industry uses fracking to unlock oil from shale; a small business owner can unleash positive cash flow.
If you want to go fracking for dollars in your small business, begin by asking three questions.
- Do we have a pricing problem? Pretty simple test to discover if this is part of your problem. How many people object to your current prices? If the answer is somewhere between no one and almost no one, you are probably underpricing your services/products. My experience with clients tells me that you want 10% to 15% of prospects and customers grumbling about your prices. That percentage includes customers who continue to do business with you, and they squawk about your prices every time they send you a check.
- Do we have a spending problem? If you’re operating without a budget or any kind of financial plan, odds are your business is bleeding cash through payables. You will want to look at your spending habits through two lenses. First, are you spending more dollars now with a particular vendor than you have in the past? Can you explain that increase as a function of increased sales? If not, odds are it’s time to renegotiate your vendor’s pricing or do some comparative shopping. Second, has the ratio between expenses and revenue increased? If it’s costing you more dollars to produce the same tired results, then you’ve probably experienced cost creep. It’s time for an in depth scrutiny of all costs.
- Do we have a collections problem? If your business sends invoices for services rendered and gets paid down the road, your cash flow problems could lie in collections. Sometimes the solution is as simple as shortening your payment terms. We once cleared up a client’s cash crunch in 90 days by tightening up his terms from a generous net 60 to a more typical net 30. Aside from your terms, you may have deadbeat clients who are using your business as an interest free lender. If this describes your firm, you want to become the polite and consistent squeaky wheel to your client. You want your client to know that you expect to be paid on time, every time. And by all means, stop doing work for any client who repeatedly ignores their commitment to pay you in a timely fashion.
Turns out many cash flow shortfalls have a blend of these three problems. If you need help diagnosing your firm’s cash flow malady, please contact me. In the meantime, you can begin fracking for hidden dollars in your business by identifying which kind of cash flow problem you are experiencing. Have fun drilling down into your numbers.
Wishing you lots of positive cash flow.
What Can I Learn Today to Improve Our Financial Performance?
You can hear when an engine is running smoothly—or racing or sputtering. The same is true for the financial drivers of your business.
You just need to know what to listen for. The good news is that your numbers are talking all the time!
Here are the best ideas we can find on how to ask your business for the information you need, to understand what it says, and take action on what you learn.