Improving Profit and Cashflow – 9 questions

• Will your profit be stable despite the price rises and salary increases?

  – Why is this important: CPI increases each year, unions and other employment organisations bargain for pay rises – as all of these costs unavoidably increase they erode your profits, and this erosion often goes unnoticed, and therefore unaddressed.
  – What you can change: Ensure you increase your prices each year inline with your local country’s growth index – alternatively you can review your costs and compensate by cutbacks elsewhere.

• Are you making enough profit to pay the directors for the work done as:

  * workers – the time spent on the floor
  * managers – the time spent organising the business
  * owners – an amount to compensate for the risk of investing in the business

  – Why is this important: As a business owner you wear many hats, but often you don’t pay yourself for all of them – respect yourself and your time by paying yourself well….Otherwise you may as well go and get a job doing the same thing.
  – What you can change: You don’t need three lines of salary on you Income Statement… simply look at what you would reasonably be expected to pay someone else for doing the work, and consider what interest rate you would get for having your money invested in the bank rather than your business… if you are not coming out at least the same then perhaps it is time to consider a career change! (Or a price rise)

• Are you making enough profit to invest in growth?

  – Why is this important: Things change; machines, shops and offices get old and tired. Even if you are not looking to expand globally, ensuring you stay up-to-date, and competitive, is important for enduring profits
  – What you can change: Allocate at least a two percent profit each year’s profit to investing back in your business for maintaining and upgrading your assets. NOTE this will probably show as a line item outside your regular budget as it affects your Balance Sheet and not your P&L – therefore it is part of how you allocate your profit rather than an expense.

B. Cash

• • Can you pay your bills as they fall due?

    – Why is this important: If you are not able to pay your bills within their terms then you are insolvent trading this is illegal in most countries. Cashflow is the main trigger of business failures so it is critical to ensure you have sufficient cash at all times, or face the harsh reality that perhaps you need to “shut up shop”.

    – What you can change: Strengthen your cash position, either by borrowing, spending slower and/or collecting faster. When I put it like that it sounds very simple; the trick is in the delivery…

• Will your debtors continue to pay at the same pace (Faster or Slower)?

  – Why is this important: Slower Debtors means more cash is locked-up, so you can’t use it to pay your own bills and staff; it is usually the biggest contributor to bad cashflow. Debtors paying sooner will mean you can reduce your borrowings, or fund growth more easily.
  – What you can change: This recent blog articles has more tips

• Will you stay within your Overdraft Limit for the coming year?

  – Why is this important: Changing your bank finance is time-consuming, lengthy and risky – if you apply for more finance when you are in a weak cashflow position, the bank is not only likely to say NO but may also try to reduce the loans you currently have (or increase your interest rates)
  – What you can change: Good forecasting of cash needs and good decisions to stay within your cash capabilities.[/twocol_one_last] The easiest way to do this is to have a budget, ensure you use that to create a cash forecast and carefully monitor how you are progressing against what you predicted. Even for a tiny business creating these tools is vital.

C. Staff

• Is there a good balance between senior and subordinate staff? (Generals v Troops)

  – Why is this important: A mix of skills and effort make a business work best; make sure you have some people creating strategies and giving orders PLUS enough people to carry out the orders to get things done.
  – What you can change: In the very early stages of any business often the owner must be both a general and the troops as well. The key here is usually somewhere around the 80:20 rule. 20% of all business effort needs to be thinking, planning, and directing (improving profit and cashflow) – and 80% of the business effort needs to be delivering.

• Are your staff levels influenced by the cost to the business or task requirements?

  – Why is this important: Generals are more expensive and Troops are cheaper.
  – What you can change: When you set time aside some time every month to review your costs (see above) also spend a little bit of time considering the tasks in your business. What tasks can be performed by cheaper staff and which staff can improve the complexity of their tasks. ie is there anyone in your business that with a little bit of help can be up-skilled in a cost effective way and are there tasks in your business that can be moved down the seniority ranks – can you use a “Girl Friday” only on Fridays to do a batch of menial tasks such as refilling the photocopiers, doing the stationery run, stuffing envelopes, conducting market research, calling debtors – Uni students (and not just Girls!) can be ideal for these roles and free more senior staff up to work more relevant to their skill set. For more details have a look at Save Payroll Costs.

What will you do with your 9 answers for improving profit and cashflow?