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Best of the Janes: Handling Cash Flow Challenges
Posted on December 3, 2009 - Filed Under Uncategorized
When your business isn’t bringing in the money you need, there are three possible reasons:
- The business isn’t creating enough sales (revenue)
- The business isn’t profitable enough (either you’re not charging enough or your expenses are too high)
- The timing is wrong (you have ample revenue and profitability, but you pay everyone before you get paid – creating a timing crunch while waiting for the next check).
Before taking action in your business, you must first decide which of these three challenges you’re facing. Knowing what you’re dealing with will help you generate cash (and right the ship) more quickly.
1. Not Enough Sales/Revenue
Assuming this is your only problem (and you aren’t also facing #2 above), the solution for this cash flow challenge is simple – turn up the volume on your sales and marketing efforts. In particular, you want to focus on sales and marketing activities that gain new customers quickly, without compromising profitability.
Which activities are right for you are going to depend on the nature of your business. However, for most businesses, the quickest way to generate revenue is to tap into your existing customer base for incremental sales and/or referral sales. Contests and limited time offers are a great way to stimulate immediate demand among those who already admire your work – and if you build in a referral component, wherein existing customers also get bonuses when they introduce you to new customers, you’ll broaden your reach as well.
If you feel your marketing and sales efforts are already turned way up, though, and you’re not still not attracting the number of clients you need, it’s time to do your homework (aka research!). Something about your marketing and sales message is not resonating with your prospective customer, so it’s time to find out why. It’s time to conduct some market research in your industry to understand whether your price is too high, you’re targeting the wrong market or too broad of a market, or your message needs to be tweaked so they more clearly understand the benefits of buying from you.
Well-priced, beneficial products that are well promoted will always find loyal customers – so have faith that once you get your marketing working appropriately, you’ll create the levels of revenue that are just right for you.
2. Not Enough Profit
This challenge is more difficult to deal with and will require you to create a budget for your business so you can play some “what if” games. Further, in my research with over 2,000 female entrepreneurs, I’ve learned that businesses with insufficient profit levels often reflect the mindset of their owners – wonderful women with amazing skills who are simply not charging enough for their incredible talents and gifts. If you have plenty of customers and work to do and still aren’t making enough money, this is your primary challenge – and there’s no point doing more marketing until you have it resolved. When you sell yourself cheap, more customers only compound the problem!
Setting this right in your business begins with an objective look at your business budget. I love to do this in Excel, so I can easily change key assumptions about price and costs and immediately see the impact on the bottom line cash flow of the business. At the top of the page, create a line for each type of income your business creates. If you have product sales, enter the price of the product and the number of units you sell in a month to create total sales for each product. If you do hourly work (like coaching, designing, consulting), enter your hourly rate and the number of hours you work to compute your total hourly work income. If you teach classes that people pay for, add that in as another income stream. Once all of your major sources of income are documented, create a total income line that sums them all up.
Do the same for expenses, itemizing every significant business expense on a row of its own, listing how much you spend in that area each month. Total all of the expenses. Next create a row subtracting your total expenses from your total income to see your monthly income (before taxes).
Here’s where it gets fun! What if you increased your hourly rate by $20 an hour? Plug in that assumption and see what happens to the “bottom line”. What if you took a 10% increase on the price of your products? Does that have a bigger impact, or not? What if you doubled the number of hours you bill for? – when you plug that in, if the bottom line number is still not exciting, that’s your clue that you are definitely not charging what you are worth!
As you play these games, remember to be realistic – if you already charge at the high end of the spectrum in some categories, your ability to charge more will be limited. If that’s the case, you might be better served by taking a critical look at your expenses. Are you spending more than your business merits at this particular time? Where can you cut? Or, conversely, how much do you need to grow the top line in order to afford the systems and structure you’ve built?
Have fun with this and create a budget that reflects a way of working (and pricing) that you can feel excited about. Then set about creating the changes to bring that budget to life!
3. The timing is off
Some women run profitable businesses overall, but they don’t actually receive their money until after they’ve paid their expenses. This can lead to harrowing times, especially in a tougher economic climate, when they find themselves watching the mailbox daily, waiting for the check to come in. If this is your business, there are four strategies you can employ to smooth out peaks and valleys over the long term:
- Offer early payment terms – this can include discounting your invoices when paid within 30 days (2% terms are very common in the corporate world, for example)
- Front-load your invoicing – reconfigure your invoicing process to be more favorable to getting cash in quickly. Ideas include requiring out-of-pocket expense be covered before work begins, or dividing total cost so that you get more money up front (such as 2/3rd on approval, 1/3rd on completion of the work).
- Obtain a line of credit for your business. Hopefully, you already have a relationship with your local bank management. If not, begin building one. Having a line of credit available can definitely help manage flow when you’re in a pinch – you know the money is coming, it’s just not in the mailbox yet.
- Create a cash reserve. Similarly to obtaining a line of credit, you can slowly begin to create your own cash flow reserve. Earmark 10% of profits from each sale or project to go into a cash reserve fund, for example. Over time, this amount will grow and you can use it to smooth over times when the money is tight. Just be sure to replace what you draw out of it when the check comes in so you remain sufficiently liquid to be able to cover a few months’ expenses without worry.
Every female entrepreneur is going to face cash flow issues from time to time. Diagnosing the cause of your cash flow challenges will lead you to the right solutions – and create more money with which to grow your business and/or enjoy your life to the fullest!
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