Cashflow is King!…Or is it?

The phrase ‘cash flow’ is very appealing. From a layman’s perspective, it sounds as if you a swimming in money, and there is an endless string of notes in your pocket.

This is not the case, in my experience, I see that while business owners and managers are focussed on cash flow they are less focussed on profitability, which ultimately led to reduced profitability and sometimes to business failure.

Cash flow is not king, it is not just there ruling over you. You need to learn to predict and master it as it ebbs and flows around your business, and you master it with magic…

Margin is Magic

Margin is one of the most important measures in business. It is the level of margin you are making on the sales of goods and services. If you don’t get the margin right you will simply not have a sufficient cash to flow in your business to sustain a viable business.

Margin, gross profit, gross profit rate, all talk about the amount of profit you make on each individual sale.

For Example:A coffee shop may have an average sale that comprises of two cups of coffee and muffins.

In this example the margin is 62.50%. Yes, cash flow is important but as a small business if you don’t have margin your business will fail.

Once you are clear about margin and that you can generate sufficient sales that will generate sufficient cash flow to sustain your business.

So, what is Cash Flow?

Firstly, it simply means the difference of cash coming IN to the business and the cash going OUT of the business. Cash flow is in its simplest terms; more money in, less money out and if the number is positive you have a positive cash flow. Pretty simple really.

Let’s look at the components that make up cash flow:

The key thing to know is when is the cash coming in and when the cash is going out. All of the things in the table above can have a real impact on the cash flow of your business. Let’s look at a few examples;

1. Specialist Confectionery/Chocolate Shop

If you’ve plotted your cash flow as this diligent confectionary shop owner has you’ll see that the graph is not even. This tells the business owner that there is need for an overdraft of over $200K and that overwhelmingly the major revenue generating period is around Easter.

2. Specialist perfumery

Now, let’s look at an altogether different type of business; a specialist perfumery like this. Most of the sales in this high-value product business occur in the last weeks of each year. Again, there is a need for an overdraft or available funds as the business builds up stock.

3. A Handyman / Home Services businesses

Generally, sales will peak towards Christmas and drop dramatically in January as many homeowners head on holidays.

By now you should understand how Cashflow may be king but, it’s king of nothing without the magic of your margins! It’s also not enough to just know your margins but you should know your cash ebbs and flows (pun intended).

If you want to learn the skill to controlling your cash flow and regulating the numbers in your business attend one of our Show me the Money workshops.

Show Me the Money!

Just Small Business runs workshops for Small Business owners to

• Calculate the sales required to achieve the Net Profit you want
• Create Profit and Loss forecasts for the next 3 years
• Create cash flow forecasts for the next 3 years
• Do a reality check—does it all make sense?
• Create specific goals and action plans to make it all happen.
• Create a Scorecard to keep you on track