Is your business generating enough cash flow to cover all your needs? You’ll know it is if you’re able to answer all the following questions with a ‘yes’ response…
- Do you take a regular draw?
- Are you current on your income taxes?
- Are you current on both personal and business debts?
- Do you have enough cash in the business to smooth out seasonal fluctuations?
- Do you have enough to cover capital investments, like truck purchases?
The truth is that for most businesses and business owners, the answer is “no” to at least one of these questions. Often I’ve found the answers to the questions above go like this: no, usually only in April, no/yes, no, and man, I wish!
The end of the year is a great time to tackle these questions and set plans to make each of these answers ‘yes’ for the year ahead!
The first step is to plan how your business cash flows would need to be divided to cover all the needs noted above. It goes without saying that you must pay your people, buy materials and supplies, and cover your overhead costs. Everyone knows that. But in addition to those things, your business’ cash flow must also cover the items in the bulleted list above.
If you’ve got no way to do so, we’ve made it easy for you with our annual goals planner here. Download it right now and get to work setting goals for how your business cash flows will be divided and distributed.
Profitability and Profit Efficiency
In many cases, not having enough cash flow to cover all needs is not simply a matter of not having a plan. It is often a matter of a business not having enough profit or profit efficiency.
Your business makes a profit by getting paid more for your services than your input costs. It has profit efficiency when it routinely promotes, sells, and performs those of its services that generate the most profit (in dollar terms) per unit of time and assets.
If your business is not profitable, start by making sure it is as efficient as possible in its expenses. Then, consider if your business is performing high-quality work with high-quality customer service. If it does, your business has a chance to survive.
However, to thrive it also needs to add something extra to those steps. Do something (in strong demand) that competitors don’t, won’t or – especially – can’t! Establish a reputation for being the best provider or for providing in-demand high-end or difficult-to-find services. These are courses that tend to lead to higher profit potential.
If your business is not profit efficient, figure out which of your service types generate (or could generate) the most profit per week, month, year, etc. and per asset investment. Then, make those services the focus of your promotion and marketing efforts, and build work crews to specialize primarily in those services and make them your business’ core focus or sole specialization.
Trust me on this one… if you take my advice on the preceding three paragraphs (and we can help you if you need it) and do it well, it will make a transformative difference to your business and finances!
For the owners I know, their thinking generally works something like this (with some variation)… I love having my own business, my trucks, opportunities to expand, my crews, and my autonomy. I’m not so crazy about debt payments. I sometimes neglect my personal bank account and my family’s financial needs or requests. And I really dislike paying insurance, workers comp and taxes!
And, not surprisingly, this order represents the same priority order in which “mouths” often get fed from a small business’ cash flow! Those things the owner likes get first dibs. Those things lower down on the list get what’s left, if anything at all.
But it cannot be this way for businesses that are going to succeed over the long haul. Not paying your debts and bills will get you in bankruptcy court. Not meeting your family needs could get you in divorce court (or worse). And not paying your taxes, could get you locked up.
So, the cash flow goal needs to be disciplined balance in covering all the needs you and your business have – without overfeeding your favorite ones and starving your least favorite ones. And, again, I encourage you to check out our annual goals planner, which will help you set a balanced plan.
Sustainable Growth Pace
Another key thing that leads to lots of ‘no’ answers to the questions at the beginning of this commentary is overly-rapid growth. Rapid growth, in the businesses we commonly serve, requires investments in trucks, work crews, facilities, and accounts receivable expansions.
As a business grows, each of these items typically grows as well. As they do, and especially at a rapid pace, precious cash flow for other important things – like owner draws and taxes – disappears into business reinvestments – which is yet another opportunity for a visit to personal bankruptcy court!
Therefore, a moderate rate of growth is usually the best growth pace for the businesses we serve, and I encourage you to read my blog post here for more discussion on that issue.
The end of the year is upon us now. Make it your goal for the year ahead to put these disciplines in place, and then to perfect them over time.
They will make a difference for you and your business. More money. More sanity. More time away for breaks. More enjoyment.
Long live small business! Long live small business owners!
Jim Smith, Founder, PERFORMIDABLE, LLC