Cash Is The Ultimate King
Updated: Apr 13, 2020
Successful businesses do two things #1 they make money and #2 they generate cash.
You can make a profit and still go out of business because you have a negative business cash flow.
Remember this statement: Cash is King and in the context of the following discussion, this means positive cash flow – taking in more cash than you are spending.
Positive cash flow will keep the doors open, long after profitability will. (Amazon is a good example – 20 years of no profit?)
Making money is about your profitability and cash is about the wealth-generation of your business.
You can’t spend profit; you can only spend cash.
Positive cash flow gives you the financial cushion – and confidence – to implement changes AND make your BIZ more attractive to future potential buyers because they won’t have to commit funds to working capital.
Before discussing the ways to improve cash flow, let us understand the concept itself.
Cash Flow is nothing but the total amount of money being transferred in & out of your business.
The Majority of Businesses Fail Because of Poor Cash Flow Management
We know that the majority of small businesses fail within the first five years. U.S. Bank conducted a study and discovered the following reasons why this occurs.
They found that 82% of the time, poor business cash flow management or poor understanding of cash flow contributes to the failure of a small business. (from Jessie Hagen of U.S. Bank, cited on the SCORE/Counselors to America’s Small Business - https://www.score.org )
82% – Poor cash flow management skills/poor understanding of cash flow
79% – Starting out with too little working capital [cash or line-of-credit]
78% – Lack of well-developed business plan, including insufficient research on the business before starting it
77% – Not pricing properly or failure to include all necessary items when setting prices
73% – Being overly optimistic about achievable sales, money required, and about what needs to be done to be successful
70% – Not recognizing or ignoring what they don’t do well and not seeking help from those who do
How do you know if you have a cash flow problem?
To state the obvious: You know if you have a cash flow problem if your expenses exceed your cash, then you have a cash flow problem.
If you take in $400 today and spend $500 you have a cash flow of $900 but a negative cash flow of $100
Too many small business owners think that the answer to cash flow management problems is to sell more and increase revenue and far too often that only exacerbates the problem.
When you chase growth based on revenue too often it causes you to make bad decisions because you are operating from the notion that everyone is your market and every product or service you sell and inventory should be sold – there is nothing further from the truth.
When revenue is your end-game and everyone or everything -is your-market is your mind-set, you spend money foolishly on things that don’t matter for customers that don’t matter.
When you take an 80/20 view to cash-is-king, you will discover that you have expenses and inventory for the 80% that are generating little to no profit.
There are several factors to consider before leaping to the “sell, sell, sell!” mindset to reverse a cash flow problem.
Track & Categorize your spending. Make this categorization your first step. You need to know exactly what you’re spending and where you’re spending it.
Benchmark Best Practices. You need to know how other businesses within your industry and market are spending their money and use those benchmarks to spend similarly. You don’t want to spend more cash than you have, so regardless of the benchmarks you’ve discovered from other companies, adjust accordingly depending on your available cash.
Manage Your Spending. “It takes money to make money,” is a common belief and can cause business owners to fall prey to overspending, especially in the early stages of their business. While it’s true it does take money to make money, not all expenses are created equal. Stay aware that every dollar you spend is subtracting from your profit margin, so be especially diligent during the early stages of your business, it is important to consider the cost Vs benefit of every single expense.
Expense creep happens all the time…imagine what is going on with your business.
Software subscriptions you don’t use.
Inventory you don’t sell or hardly sell.
Anything that doesn’t serve your best clients.
Right now is the time to take a good look at every line-item like a hawk scanning for breakfast and ask yourself:
- Is everything really necessary?
If the answer is "Yes"
➡ 𝗗𝗼 𝘆𝗼𝘂 𝗰𝘂𝗿𝗿𝗲𝗻𝘁𝗹𝘆 𝗵𝗮𝘃𝗲 𝘁𝗵𝗲 𝗹𝗲𝗮𝘀𝘁 𝗲𝘅𝗽𝗲𝗻𝘀𝗶𝘃𝗲 𝗽𝗹𝗮𝗻, 𝗱𝗲𝗹𝗶𝘃𝗲𝗿𝘆 𝘀𝘆𝘀𝘁𝗲𝗺 𝗼𝗿 𝗶𝘁𝗲𝗺 𝘁𝗵𝗮𝘁 𝗰𝗼𝘃𝗲𝗿𝘀 𝘆𝗼𝘂𝗿 𝗰𝘂𝗿𝗿𝗲𝗻𝘁 𝗻𝗲𝗲𝗱𝘀?
We’re offering the “Cashflow Crisis Expense Chopper” as a complimentary tool for businesses to use to get a full picture of their:
3. Cash Runway
Go here to get it now - https://www.finepointmarketing.com/expense-chopper