I hope I am not describing your business, but if I am, you are not alone. In fact, one of the greatest reasons businesses fail is because they do not have enough cash to pay their bills. I am sure you were excited when you finally had $1 million in sales. It is a great milestone. You may have been working on reaching it for a while. However, for some the wakeup call came soon after, as they realized it was getting harder and harder to make payroll or pay the bills.
Regardless of how or when you found out something was wrong; this is not something you can let take care of itself. The longer you wait to start, the more difficult your journey to positive cashflow will be.
Fortunately, if you get ahead of it quickly, you can weather your cash flow storms easier and reach your destination safely. This article will share 3 actions you can take immediately to get back on track and save your business. Let’s get to it!
Calculate your Daily Burn Rate
The first step in fixing a problem is defining what the problem is. Calculating your Daily Burn Rate helps you to see where you are today. What is a Daily Burn Rate? It is the amount of cash you spend each day on average.
Dividing your bank balance by your daily burn also gives you a quick idea of how many days your business can survive without another sale. It is also a great metric to measure your progress.
You can download a spreadsheet here to calculate your own daily burn rate.
Cut Costs
Yes, not very earth shattering. It’s obvious to start cutting costs if you do not have cash. The challenge is not in cutting costs as it is in cutting the right ones.
In my last position as an operations manager, I worked for a business whose first response at any sign of trouble was a 10% reduction in headcount everywhere! I had a quarter billion-dollar backlog and a new, understrength team, and still had to give up 10% of my team. The result of this blanket reduction was we were not well prepared for future orders and it slowed down the business’ ability to make a profit.
Before you begin to cut costs, you need to understand what kind of impact it will have for your business. Reducing the amount you spend on coffee may make some people unhappy, but will probably not impact the business’ ability to create cash flow. On the other hand, reducing the spending on an effective marketing program may. Regarding my earlier headcount example, let’s say you decide to let someone go. Who is going to do what that person was doing? If that person’s activities do not go away with the individual, then the cost may show up as additional overtime and may even cost you more.
Bottom line: Make sure you understand the full impact of any cost cuts, before you make them.
Sell your best cash flowing product/service.
Now that you better understand your situation and have begun to prune back those unnecessary expenses, you need to focus on bringing more cash into the business. In the long run, it is not possible to cut your way to better cash flow.
Before you can start to sell your best cash flowing item, you need to know which one it is. Here are a few questions which can help you to narrow down your products to the ones with the most potential impact.
- Which of your products/service has the highest profit margins?
- Which of these products have the highest customer demand?
- Of these products, which could you sell without purchasing any additional components. This relates mostly to physical products versus services and focuses on items that would be immediately consumed at the time of sale. A great example of this is using existing inventory.
- Finally, which of these products would require you to expand your capacity to be able to fulfill the sale? For example, a $1 million sale with a 50% net margin would really help your cash flow. However, if you have to spend 600k on production modifications, new employees, or another location to fulfill the sale, then this is probably not the best place to start.
Someone said:
“Revenue is Vanity; Profit is Sanity; Cash Flow is Reality!
Once you know your current situation, take informed cost cutting decisions, and focus on selling products which bring in cash, your reality will change. You will no longer worry about paying the bills and be able to focus all your energy into growing your business. Finally, you will be on the path to creating the business you have always wanted.
Resources:
Daily Burn Rate Calculator – COMING SOON!!
Cash Flow Crisis: 9 Key Steps to Survive Today and Thrive Tomorrow. If you found this article helpful, then you need to download this booklet. It covers many more ideas on how to increase your cash flow as quickly as possible.
Sign up for your free 30 minutes Discovery Call. During your call, we will evaluate where your business currently stands on its journey to being Cash Flow rich, learn about your aspirations for your business, and whether we are the best team to help you reach them.
