Understandably it's not unusual for a business owner to ask me how to make more…
Most owners out there have ambition to grow their businesses but growth can be a challenge if you’re not prepared for it and if you’re growing at a rapid rate then you’re inevitably going to have cash flow issues. You may have more customers than you can handle and need to grow your team or buy new stock to keep your shelves full. Whatever the challenge, for that sort of growth you have one of two options. You either need to find further investment or more likely, you’ll need to cash flow the growth.
If you chose the latter you’re going to need to manage your cash flow. So where do you start? First look at your cash gap.
Your cash gap is that time between spending the money you invest to grow and when you actually see a return on it, and this primarily where cash flow problems occur.
Let’s say you’re going to buy more stock, so you order it today and you need to pay for it in 30 days time.
You then sell some of it to someone whom you also give 30 days to pay but of course some of them take 60 days or more. So it’s clear how the cash gap can lead to bigger problems.
What most companies need to look at in this scenario is how do you move to people buying over shorter and shorter terms?
Keep in mind that if you’re falling prey to the cash gap there are companies in which the cash gap is actually in reverse. These companies buy but won’t pay for 60 days yet they sell those products well ahead of those 60 days…and as you can imagine that’s a healthier looking company.
But what about companies in industries that traditionally have cash gap problems, for example building. They probably get paid at the end of the job but why? Well, because that’s the way they’ve always done it.
That kind of “We’ve always done it that way” thinking can hurt your business, and it will definitely lead to a cash gap and cash flow problems.
So review your terms and give your clients the opportunity to pay in instalments that meet your cash flow requirements. Position what you expect from your clients right from the beginning of the relationship, in other words teach your clients how to do business with you.
And in keeping with this mind-set, if you need to be paid within 30 days but you have clients that continuously wait until 60 days or more, sack them and find new clients who will work within your terms. In other words, don’t let growth hamper your business by letting the cash gap spiral out of control.
True growth isn’t necessarily the size of your business, it’s the size of your profits and growing for growth’s sake can be the worst thing you’ll ever do. But if you understand cash flow, the cash gap and managing your growth, you’re building a healthy business.