If you’re planning for growth, the key to success is carefully understanding your numbers and we’re not talking profit and loss here. We’re talking cash and cashflow. After all, turnover is vanity, profit is sanity and cash is definitely queen, especially when it comes to that growth you’ve been dreaming about.
A business cannot use profit to trade; it uses cash. Therefore, like any other asset, cash needs to be properly managed and planned for. However, there are plenty of pitfalls some entrepreneurs face when it comes to the lifeforce of their business. Here are the 7 deadly sins of cashflow management and how you can avoid them.
1. No rainy-day reserves
Don’t pocket every penny and pound you make, and don’t put 100% of it back into the business either!
Take some of your hard-earned operating cash and toss it into a savings fund. You never know when you might need it.
For those of you who haven’t hear of the Profit First Method, a great way to look at your figures is:
Sales – Profit = Expenses
Your focus is not so much on the sales but it’s on making profit, and whatever is left is what you must run your business on. You should have several accounts for your business to operate under the profit first model:
- An income account. This is where your sales come in.
- A profit account. This is where you regularly allocate a certain percentage for yourself as profits
- An owner’s comp. This is essentially your salary accounts. Obviously if it’s just you and your business that salary account may be the same as your profit account. But if you employ a couple of staff members, that would maybe your salary pot.
- A tax account. The percentage that’s owed to the taxman.
- An OPEX account. This is essentially operating expenses for your business.
This method will ensure you have plenty of rainy-day money without foregoing what you should be paying yourself as a business owner and therefore will help you avoid entrepreneurial poverty.
2. Focusing too much on interest rate
When looking into business loans for your brand, interest isn’t the only important factor.
Yes, a lower interest rate is nice, but here’s three other factors to consider:
- What’s the term of the loan?
- Is the loan secured?
- Is there any flexibility built into the repayment plan?
3. Not keeping your financial house in order
If record-keeping and other finance-based tasks are on the bottom of your to-do list, it’s time to prioritise them.
Being diligent about keeping your financial records in order is one of the fastest ways to growth; you can see at a glance where you are with regards your cashflow and profit (which are the two underpinning pillars of your long-term vision and goals).
Working with a fantastic accountant or a skilled interim Financial Director can be an effective way of managing your finances to affect the growth you want.
4. Not chasing your invoices
How big is your accounts receivable number right now? It’s exciting to see it grow, but the money isn’t actually yours until it hits your account, and your AR sheet is £0.
Don’t be lackadaisical about your invoices. Just because you’ve done your bit, doesn’t mean your client will be quick to do theirs. Ramp up the pressure and be forceful when it comes to collecting the money you are owed.
5. Having unrealistic sales projections
You’re an ambitious entrepreneur dreaming of growing to a 7+ figure business so your sales goals should be big. However, make sure that number is achievable! If you have the relevant historical data available, use it to make objective and realistic sales projections.
Before doing this, it would be useful to conduct a SWOT analysis to help shape what those realistic projections might look like.
6. Overspending on sales and general expenses
When starting out, brands need to spend more to get the resources they need for product creation, marketing, selling, and delivering. However, once your business is past the start-up stage, you should be looking to lower that number.
7. Not knowing your numbers
As a founder, it’s vital that you know your numbers! When someone asks about your:
- Conversion rate
- Lifetime value and retention rates
- Customer acquisition cost
You should know the answers! You’ve got to know your numbers to have a handle on your cashflow.
Read my blog ‘Answers You Should Know’ for an idea of what else you might need to brush up on.
If you feel you are making too many of the above mistakes when it comes to cashflow, then the likelihood of you reaching that 7+ figure business is certainly hindered. But hope is not lost – you just need a little push in the right direction.
If so, get in touch with me today to learn how I could help.