Often, I sit in front of a client and tell them they have had a good year with good profits. And I do it in a smiling, satisfied fashion. I am not sure I have the right to do that because very rarely am I the one who has done any of the hard lifting that resulted in said profits. Yes, I give ideas, options, facilitate problems, issues and make sure clients are meeting targets and goals, but I am not exactly on the shop floor selling goods or services. Nor do I burn the midnight oil for clients. So am I am not always convinced being a bit smug is justified.
However, it is always good to see clients progress and make their business a success.
But then we get on the discussion of taxes, which usually does not result in many smiles.
But to be honest, I can deal with that. The bit that I find harder is the bit that I instinctively know is coming my way. And that is a question that is almost always asked and it goes like this:
‘But Hitesh, I know you are telling me I made profits but where is it in my bank account?”
And I dislike that not because I don’t know the answer but because I usually must tell the client that
i. they are overspending or
ii. they are taking too much money out of the business or
iii. their business is running inefficiently. And no one wants to hear that.
But is it a logical question? It’s one I often ask Ros, my business partner. She often puts a report under my nose that says we made $X profit a month. And always ask her where the money is.
Cash flow is effectively blood flow, and we all know without blood flow, you die.
That sounds bleak because it is. But it just shows how important it is to manage your cash flow well from the very beginning and protect your business against any problems along the way.
Even if your business is very profitable, you’ll struggle to cover your costs without sufficient funds available. But do not assume that excess of cash is always good. It may suggest that you’re not re-investing enough into scaling your business or innovating or modernising. I have seen many businesses do this and realise it is too late to do anything about it. Every business must change, innovate, and invest in itself.
But here is the honest truth.
- If you have a growing business or a growing team it will eat cash like you can never believe. This is because a growing business, and in particular a growing team requires more resources, more systems, more procedures.
- If you are making profits and feel good about it, you will spend more. Ever noticed that the more you earn the more you spend? This is true in your personal life as well as your business life.Let me give you an example. WOW! Advisors has had a few good months in getting new clients and generating profit. So much so that I feel I need to reward myself and am now wanting a new car. Do I need one? Nope? Is it necessary? Nope. Will it in any way help the business? Nope. Will it make me feel good? Hell yeah!
See what I mean? This is what happens when our businesses do well. And that this why Ros’s explanation to me about where the money has gone is the same: ‘It’s because you are spending it, you idiot!’’
But if you have good money or cash management, it is possible to balance it. After all, what is the point of your business doing well if you cannot enjoy it?
So, how do you ensure you maximise cash from your business?
1. Cash Flow Statements & Projections
Most advisors and accountants spend their lives analysing profit and loss and balance sheets. But really the most important one is a cash flow statement or projection, something many of you may not have seen.
Why?
Well, a profit and loss and balance sheet is part of compliance work – the law says you have to have this so we do it. A cashflow statement on the other hand is extra work which is charged separately so many businesses do not want to pay for it.
A cashflow statement is simply a statement showing you movements in cash over a period of time. How much cash has come in, and how much, including exactly where it has gone out.
A cashflow projection is more complex and requires more input from management. That is because we are trying to project future cash coming in income and future cash expenses, something that is not easy at the best of times.
A cashflow projection does something else too. It can tell you times when you will be short of cash, so you have time to plan for it.
2. Prepare a Safety Net
Remember Covid?
Most of you don’t want to but think back when the country shut down and our government had not decided how to help. Most clients were shut down and had no income.
I had some serious heartbreaking conversations even from clients who had high incomes. They were all based around how long they could survive. In most cases it was less than a month or two.
I have always run my business on the basis that it should have several months of funding available even if fee income is $0. And you should, too.
That does not necessarily mean cash in hand but a funding source like lines of credit, business loans, etc.
And I am not saying that just because another pandemic may come along but because a business must invest in its growth, and that can lead to short-term negative cash flow. And business generally is never stable. Some months are good many can be bad too.
3. Debtors Will Kill You
Giving your customers credit can kill you because you now become reliant on them. If they do not pay you, you can’t pay your bills. And that becomes your problem.
Many of my clients say they cannot change things around. In some cases that may be true especially when it comes to larger companies that have regulated payment policies. But most things can be changed if you are brave enough to make the change.
The accountancy industry was one which worked on invoicing and collecting debt. WOW! Advisors moved from invoicing to monthly billing for routine work a few years after it started. For non-routine work we moved very quickly from instructions from clients and taking payment. It took literally days. Customers only complain if you are not providing service they expect. If you provide a service they expect, do not assume they want credit. Only give credit where you must.
4. Stock will also Kill You
I hate stock. But it is a necessary evil if you are in manufacturing or retailing.
Money tied up in stock is wasted money. You must store it and insure it too. That means stock levels need to be kept at minimum levels. Always.
Often, I see stock at a client’s premises and instantly know that some of it is dead stock. Get rid of it and manage it so that it is kept to a minimum.
5. Expenses – Including What You Take Out
When a business has a cash pile, we think the business is rich and start spending on things we may need (such as marketing) or things we don’t need (such as cars). But the key is to control all spending and justify each expense as much as possible.
Here are two questions I often ask when making a payment from a business:
a. Is this payment necessary to keep the business open? (rent, running costs, etc.)
If the answer is yes, then make the payment. If no, ask the next question:
b. Will this payment increase the income of the business?
If the answer is no, then you are wasting money if you spend it on that activity. If yes, then make the payment.
And this is why my wanting a new car does not make sense. But running a business is not always about what makes sense. It is all based on emotion. And that is probably why a new car is probably going to come my way.
Managing cashflow is step 6 of our 9 steps to working less, earning more and creating wealth. If you would like to know more about our 9-step signature system, please contact the WOW! Advisors team on 07 3161 9548 or email info@wowadvisors.com.au.
