How to Manage Cash flow in your Small Business

Transcript:

Most small businesses focus on profit rather than cash flow, but the two are not the same.

In this video blog, we will discuss the five primary levers for growing profit and how you can use them to manage cash flow in your small business.

We’ll also talk about the difference between profit and cash and why it’s essential to understand both concepts to succeed in business. 

In this video, we will discuss the five primary levers for growing profit and how you can use them to manage your cash flow in your small business.

Hi, I’m Doug Barra. I have the honor to have been coaching business owners, like yourself for 16 years. As a coach, I’ve seen firsthand how much courage it takes to be a business owner. You’re constantly making decisions that will impact your life, your family, and often your community. I admire you for that. And, even with all the courage, it takes to be a business owner, one thing still seems to trip people up: managing their cash flow.

So, in this video blog, we will discuss the five primary levers for growing profit and how you can use them to manage your cash flow in your small business.

But first, let’s talk about the difference between profit and cash.

Many people think that profit and cash are the same, but they are not. Profit is what’s left of your revenue after you’ve paid all your expenses.

On the other hand, cash flow is the timing of when your money comes in and goes out. So why is it important to understand the difference between profit and cash?

Because they are two very different things and need different management. You’re looking at the long-term game when you’re focused on profit. You’re reinvesting in your business so that you can grow and scale. But when you’re focused on cash flow, you’re looking at the short game. So you need to ensure you have enough cash to cover your expenses. 

And often business owners get into trouble because they focus on profit at the expense of cash flow. They’ll reinvest all their cash into the business without keeping any reserves, and then when an unexpected expense comes up, they’re scrambling to find the money to cover it. So it’s essential to understand both concepts and strike a balance between them. 

I had a client one time that would simply look at the balance in his bank account and use that to determine what he could make when he could make a purchase! Then a few days later, when a bill came due or an opportunity arose, there wasn’t sufficient cash, and he was scrambling. 

I often speak with clients who wonder, “How come my books say I’m making a profit, but I’m always scrambling to pay my bills?” This is usually because the money was invested in stock or used to pay off debt, neither of which is reflected in your profit.

Now that we’ve talked about the difference between profit and cash, let’s talk about how you can use the five primary levers for growing profit to manage your cash flow in your small business. 

The first lever is the number of leads. This is the number of people that are interested in what you have to offer.

The second lever is the conversion rate. This is the percentage of leads that you convert into paying customers.

The third lever is the average number of transactions. This is the average number of times that each customer buys from you.

The fourth lever is the average amount of each sale. This is the average amount that each customer spends with you per transaction.

And finally, the fifth lever is margins. Margins are the percentage of each sale that you keep as profit.

So how can you use these levers to manage your cash flow in your small business? Well, let’s say you’re focused on increasing your profit. You might choose to increase your prices or decrease your costs. But if you’re focused on cash flow, you might decide to increase your volume by selling more products or services. Always remember that it’s also vital to understand the difference between your variable costs and your fixed costs.

Your variable costs are the costs that change based on how much you’re selling. So, for example, if you sell more products, your variable costs will go up. But your fixed costs are the costs that stay the same no matter how much you’re selling. So, for example, your rent will stay the same whether you sell one product or a million products.

Your variable costs will be different for different products and could even be more than the product’s sale price, especially if you offer discounts, so just increasing sales may not increase your cash. 

When examining cash flow, we also have to consider when we pay for a product and when we get paid for that product. If we buy the product cash and then give our customers time to pay for it, we are in a negative cash flow position because we’ll have to purchase another to sell it, but we haven’t been paid for the first one. 

If we are in a retail store environment, we buy a certain amount of stock and have to sell some percentage before paying for the initial purchase. These are just a few examples of how you can use the five primary levers for growing profit to manage your cash flow in your small business.

 It’s, it’s essential to understand that they are two different things -profit and cash – but they are both critical to your business. And if you want to be successful, you need to find a balance between the two. If you have any questions or would like to share your own stories about profit and cash flow, please leave a comment. 

Would you like to learn more about managing cash flow in your business or other topics regarding business success?

Yes!

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I’m Doug Barra, and I’m passionate about helping small businesses succeed.

Thank you for watching and I’ll see you in our next video.