There is nothing that can derail a business faster than poor cash flow.
Even with rosy prospects in the pipeline, a strong product line, and a stellar reputation, if you don’t have the cash to keep operations moving, your business will grind to a halt. It may even be forced to close.
The good news is that there are eight very specific things you can do to stabilize cash flow and insulate your business from cash fluctuations. These are the hidden keys to stabilize cash flow:
Business owners often price products and services without analyzing what it takes to sell them profitably. They also consider their paid time profit, when it’s actually categorized as an expense to the business. As Mike Michalowicz outlines in detail in his excellent book, Profit First, these factors matter in determining profitability:
Here’s an example of developing an accurate sense of profitability:
You charge your client $1,000 for two hours of consulting.
Your actual expenses to deliver the entire project:
Working fee: $150/hour = $675
Total cost of business operations:
Total income for the project: $1,000
Total expenses for the project: $944.13 (Working fee plus the cost of business operations.)
The total profit to the business for this project: $55.87
That means you’re putting in more than four hours of work for only $55.87 in profit. To make this service more profitable, you could:
Sometimes, payment delays are the result of poor organization and planning on your part. You can prevent some cash flow issues by setting clear payment policies and staying on top of project communication.
Here are some planning tips:
Very often, cash flow problems seem like surprises because the business owner did not have accurate and up-to-date financial information.
Here are some tips for managing your business finances:
Too many business owners execute marketing in sporadic tidal waves of activity. Instead, build your marketing plan to include very specific, small, and easily actionable activities that you can implement every single day in less than 15 minutes.
I call these “Tiny Marketing Actions (TMAs).” Depending on your industry and the related sales cycles, seeds you plant today may not bear fruit for 6-12 months, or even longer.
Here are some tips for marketing:
Nothing feels better than going to a conference or networking event and having conversations with interesting partners and prospective clients. Too often, the momentum gained while in person is lost if you take too long to follow up after an event.
Here are some tips to follow up on leads:
Part of your cash flow problem may be that you’re losing sales you’re capable of winning. This limits the amount of time you have to devote to chasing new business.
Here are some tips for closing sales:
Lines of credit, when used responsibly, can cover times when you’re waiting on delayed payment. It’s important to manage them effectively. Also, be sure to pay off your balance as soon as cash returns to your business.
Here are some tips for business credit:
These cash flow mitigation strategies require you to be proactive in your organization, planning and daily habits. It’s critical to schedule time for this work, so you don’t continue putting them off until a cash flow crisis occurs.
Here are some tips for prioritizing your time:
It’s impossible to control every part of cash flow. But, by strengthening these eight areas of your business operations, you’ll reduce fear and uncertainty, increase cash in your business, and ensure your business thrives in the long-term.
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