SIX CASH FLOW DRIVERS
In any business, there are six cash drivers – six different areas within the operation that either generate or consume cash. Your job as a business owner is to ensure these cash drivers are managed effectively, either by you or someone else in your organisation.
Learning what these cash drivers are, what they mean to your business and how to manage them puts you in control of your cash flow, which ultimately leads to a more profitable, enjoyable and balanced business.
The trick is to understand these 6 cash drivers, and to monitor them all separately and continuously. The 6 cash drivers are Sales, Debtors, Overheads, Cost of Goods Sold, Creditors and Stock/Inventory/WIP.
Ongoing improvements and maintenance of the performance of these cash drivers will release the pressure of negative cash flow and prime your business for growth and profitability. It takes close attention to detail and consistent application of the principles you will learn from a Jim’s Bookkeepers Accredited Cash Flow Adviser, but the rewards are definitely worth it!
The most common cash driver that most business owners are aware of is Sales. And it’s usually the first one they start to work on.
Here’s how it goes for them:
Bob’s thinking about how he’s going to make budget this month, “We have to get more sales”. How about we do a big promotion and offer product xyz at a 10% discount?
Sounds like a good idea? WRONG.
1. Let’s take a quick look at what happens when you do this with a product that has 30% gross margin and sells for $55.
2. You sell 10 at the full price of $55. That’s a profit of $165.
3. Now you discount the price 10% and sales increase by 20%. That’s 12 x $49.50 giving you a total profit of only $132.
Congratulations, you just managed to give yourself more work (setting up the campaign, advertising the sale, serving more customers) and reduce your overall gross profit by 20%. And that’s all with a 20% increase in sales!
Pssst, here’s a little secret for you – by increasing your price by as little as 10% you could afford to lose as much as 25% of your current sales and still make the exact same profit.
That means you would have to lose 1 out every 4 customers. Hardly likely for a small increase of 10%.
Don’t let your customer treat you as their bank. If you’re dealing business-2-business you’ve got to offer credit, right?
Think about this: How much do your customers owe you at the moment? Now imagine you had half of that in your bank account right now. Do you think that would make a difference to your stress levels? You bet it would!
But you’ve got to offer credit don’t you, because everyone else in your industry does it too. If you don’t you’ll lose customer’s right? What if your customer still got the credit without you having to provide it?
Cash is King!
For the survival and growth of business, positive cash flow is crucial. Jim’s Bookkeepers are not only qualified bookkeepers they are also Jim’s Accredited Cash Flow Advisers using a proven process to improve business cash flow.
The Accredited Jim’s Bookkeeper CFA (Cash Flow adviser) first step will be to look at your books and perform a Cash Flow Analysis to evaluate if they can help you. This isn’t another hoop-jumping accounting exercise. This is an expertly designed Cash Flow Analysis to show you the biggest opportunities for improving cash flow and profit in your business by addressing one or more of your Six Cash Flow Drivers.
Contact a Jim’s Bookkeeping Cash Flow Adviser to perform a cash flow analysis of your business today.
Call 131 546 or click here.