Managing and running a business, whether it is small or large, is tough. Although each business is unique in its own way, here are six ideas to help your business increase its profitability and cash flow..
1. Understand your cash flow. One of the biggest causes of business failure is lack of positive cash flow. At the end of the day, you need enough cash to pay your vendors and your employees. While it may seem simple to understand your cash flow, this is always not the case. Consider the following:
If you run a seasonal business you understand this challenge. The high season sales harvest needs to be ample enough to support you during the slow non-seasonal periods. How do you deal with the flood versus the desert in your cash flow?
Businesses have unique patterns of cash flow. If you are a magazine publisher that sells one-year subscriptions, you may receive one payment from a subscriber but have to deliver issues over the next 12 months. And then there is the “double-whammy”, you must spend money to sell subscriptions. Take the following example of a 15-month period—months 1, 2 and 3 are the months of investing in your marketing and promotion costs, next you have the one-time sale of 12 month subscriptions. In the following 12 months as you deliver the issues, there are book GAAP earnings with no subscription cash.
Recommendation: Create a month by month 12-month rolling forecast of revenue and expenses to help understand your cash needs each month. As illustrated above, book revenues and expenses do not always translate into cash flow. Adjust your rolling forecast of revenue and expenses to a cash flow forecast.
2. Know your Key Performance Indicators (KPIs). KPIs are the key factors that drive your business. A KPI is quantifiable. When looking at your business, there are a few factors that drive your business success. Do you know the top four drivers of your financial success or failure? By focusing on the key financial drivers of your business, success will be easier to accomplish.
Examples: A KPI related to sales may be the number of sales calls (or outbound calls for a telemarketer) made by the sales department. A KPI for e-commerce may be website traffic and the related conversion rate.
3. Minimize / optimize your inventory. Many companies require a major investment in inventory. If your business sells physical product, you need a good inventory management system. This system does not have to be complex, it just needs to help you keep control of your inventory. Be sure to turnover slow moving inventory. Cash turned into inventory that becomes stuck as inventory can create a cash flow problem.
Recommendation: Many businesses hold on to unsaleable inventory for too long. Get rid of old unsaleable inventory ASAP. Take your markdowns and move on! Develop an inventory system with periodic counts (cycle counting) to help identify when you need to take action to liquidate old inventory or research any discrepancies.
4. Know your customers. Who are your current customers? Are there enough of them? Where can you get more of them? How loyal are they? Are they happy? A few large customers can drive a business or create tremendous risk should they go to a competitor.
Recommendation: Know who your target audience is and then cater your business toward them and what they are looking for in your offerings.
5. Learn your point of difference. Why does the world need your business? Once you know who your customer is (your target audience), understand why they buy your product or service. What makes you different from/better than others selling a similar item?
Recommendation: If you don't know what makes your business better than others, an annual survey may be helpful. Ask your key customers to rate your product and services. . They will tell you. Then take advantage of this information to generate new customers.
6. Create a great support team. Successful small business owners know they cannot do it all themselves. Do you have a good group of support professionals helping you? You will need accounting, tax, legal, insurance, and employment help along with your traditional suppliers.
Recommendation: Conduct an annual review of your resources, be prepared to review your suppliers and make improvements where necessary.
These ideas sound simple but they are important to the success of your business, Call us at 212-786-7476 (NYC) or 516-280-8363 (Garden City, Long Island).
For more helfpul informatioin on increasing profitability and cash flow, please click on the following links:
- Checklist for a healthy cash flow.
- Understanding sunk costs in business decisions.
- What is the Breakeven Point and how do you compute it?
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