You may not be in this much mess, but some businesses owners/managers do not even know what their cash flow is. Some don’t even know what cash flow is! (The dictionary tells us it is the amount by which your cash revenue exceeded your cash outlays in a given time period).
Another way to look at it is it is the income that exceeds costs and basically it becomes profit, it is one of the ‘must haves’ for continuing in business.
The chances are that you already know about your cash flow – if you stress about paying bills then most likely your cash flow is not good, or if you just pay bills without really thinking about them then your cash flow is probably quite good.
If your cash flow is bad – what can you do about it? The first step is to get control of it, and to do that you must measure it. That will then allow you to forecast your cash position, and that means you can at least schedule paying bills, and eventually you will be able to pay them without much effort at all (assuming that you also pay attention to your cash flow information and take steps to fix it – more on this later).
Start by recording all expected income over the next three or four reporting periods. You can choose any time period that suits you – weekly, monthly or quarterly though for most businesses monthly is probably the most appropriate. Next, record all known outgoings during those same periods. Many modern accounting packages have standard reports that will give you this information at the press of a button.
What do you do is your cash flow isn’t what you need to be able to at least pay all of your bills? Obviously you need to increase it, and there are a coupe of different ways you can achieve this.
Look for the easiest steps first – what will bring the biggest improvement in the shortest time for the least effort? Quite often that is chasing your Debtors.
If you give credit then check your ‘average days outstanding’ (or ask your Accountant). If that figure exceeds your credit terms then you are paying the interest on your debtors funds. (Well, you pay your borrowing cost to your Bank, and you’re only paying those costs because of unpaid invoices – and that’s money that you can’t easily get back).
Chasing your money – your Debtors – doesn’t have to mean being nasty. What I do is start by asking if they received the invoice in question, and if they say “Yes” then I ask if they recall the payment terms? If they claim not to have received the invoice then I immediately arrange a copy, and I follow that up to ensure that this was received.
If they recall the payment terms then I ask them when they ‘will’ be paying my invoice. If they don’t recall (or claim not to) then I tell them, and then ask when they will be paying my invoice. I then explain that I cannot afford to carry their interest, and that I will expect payment on that day. I then tell them that if payment is not received on that day (the day they selected) I will not contact them, instead I will contact a debt collection agency.
There is seldom any argument – they have selected the payment date, and unless it is outrageous I do not challenge it. They are also aware of the expected behaviour, and of the consequences of not behaving in the required way (pay my invoice!).
Some people say that the recalcitrant Debtor “Is my biggest Client”, or is “too big to lose”. Well, I doubt that – if they are not paying their bills then you probably are not making a profit from their business anyway. Your business doesn’t need sales that do not make a fair profit, and it doesn’t need Debtors that consistently do not pay on time.
Let’s explore that a little further. If you borrow to pay for your Cost of Goods Sold it adds those interest charges to your effective COGS. As an example if it costs you $50 plus interest you are still OK if you sell at $100. Your interest bill is effectively eliminated when you sell the goods, by paying back the loan used to buy the raw materials.
Now let’s look at a similar scenario – if your invoice is not paid then it costs you interest, either by not repaying the loan for COGS or you are missing out on Interest Received. The next month it costs you the same plus a compounding effect on the interest from last month. You pay interest once if you invoice is paid on time, or you pay compounding interest every month if your invoices are not paid on time. No business can afford that for long.
Have you changed your perspective after reading this? If so – in what way?
Many businesses resist going ‘green’ because of perceived additional costs, but is this actually correct? What if going green contributed to greater profits?
You can reduce your water bill by not using the hose as a broom when cleaning the path or driveway, and by turning taps off when you don’t need them on – for example when you are actually brushing your teeth.
You can reduce your power bill be being just a little organised – and ensuring staff turn equipment off overnight. If you want to be more organised then install switchboards that allow many devices to be turned off by a single power switch. You can use the type that has power surge protection as well, and protect your equipment from surges at the same time.
If your business has more than a dozen light bulbs then it is likely that you will achieve worthwhile savings by changing to low energy versions. You can also make better use of natural light by opening curtains and installing skylights. Modern low energy bulbs use about half of the energy old fashioned bulbs use, so the savings from this simple measure can mount up very quickly.
How green is your vehicle fleet? That’s everything from the CEO’s car to the delivery trucks. When it is time to replace vehicles consider the carbon footprint over the life of the vehicle – and imagine even a 5% or 10% saving on your fuel bill. Smaller motors, alternate fuels, and hybrid vehicles all contribute to lower transport costs.
Consider how much paper your business uses. Is every page really necessary? Did every page really need to be printed? Could you have used a digital copy instead? Reducing the paper usage has obvious benefits, and so does buying paper that has already been recycled. Even if all you do is change to recycled paper you will be assisting the environment, and today the price difference between recycled paper and non-recycled is reducing (at least it is where I live).
Many businesspeople need to fly to other cities from time to time – I will be flying nearly the whole continent next week for example. What can you do to reduce the carbon footprint of that flight? I help plant trees to at least partially offset mine. What do you do?
Now that your business is green, what about your Suppliers? Are there greener alternatives for about the same price or less? Is there a business that would prefer your products if they knew you were a green organisation? Are you in a position to inspire other businesses you deal with to become greener? How might you leverage your new green status for greater benefit?
In fact if saving on your power bill sounds like a good idea to you then hire a professional to do an Energy Audit. This will identify all possible savings and help you develop a plan to implement low-power alternatives and save money.
Before we continue – if your sales increase by $1 your profit increases, but by less than a dollar – depending upon your Cost Of Goods Sold and other factors. If your power bill goes down by $1 what happens to your profit? It goes up by the whole $1, assuming everything else stays the same.
Your business can also become a stronger shade of green by establishing a recycling programme. Recycling can mean refilling fax and printer cartridges, collecting paper, plastics and metals suitable for recycling, and even having devices to recycle that old food from the refrigerator – and don’t worry, you can ‘recycle’ food waste without the smell these days.
This isn’t supposed to be a complete list of what you can do to be a greener organisation – what are your best ideas? Or why do you not bother, if that’s the case? We’re an equal opportunity comments blog site, so tell us your story regardless of your position.