What one monetary factor can force even a highly profitable business to close its doors? Cash flow. Sneaking up on you without warning, running out of cash is a common killer of businesses.
I learnt this lesson the hard way when I was building my first business. Our revenue was growing exponentially, surpassing $1 million, but our profits were hardly shifting, and our cash reserves were dwindling – putting enormous pressure on cash flow.
When the recession ‘we had to have’ hit in 1990, my revenue halved overnight. Suddenly we didn’t have the cash flow required to weather what came our way.
I was forced to take drastic action. By restructuring the business and reducing expenses, I was able to turn the business around – and actually increase profitability despite lower revenue. We were lucky to defy the odds and recover, but most businesses won’t be so lucky.
What I learned from this experience was that understanding cash flow was absolutely key.
What is variable net cash flow?
What most business owners don’t realise is that the usual methods of managing cash flow are leaving their businesses highly vulnerable. To control cash flow successfully, we need to throw out the conventional wisdom and take an alternative path.
I now swear by variable net cash flow as the most important indicator of performance for a business. Most businesses will look at revenue or profit and loss, yet these indicators only tell a small part of the story. Profit isn’t the same as cash. Every business needs to be able to forecast cash flow as well – you cannot manage what you don’t measure.
Net Variable cashflow is calculated as follows:
If your Net variable cash flow is negative it means you will be burning through your cash reserves. If it’s positive it means you’re bringing in enough to cover your costs while adding to your cash reserves. It is very possible that a negative Net Variable Cash flow figure is causing every sale you are making to draw you further into cash deficit. This is a situation which is commonly misunderstood since most business owners see lead generation and higher sales turnover to be the main solution to their cash flow issues, which is many cases is actually detrimental.
All businesses need to be tracking their cash flow generally. I’ve worked with dozens of SMEs on their cash flow and the forecasting process has been eye opening for them. Forecasting will allow you to immediately identify if you’re likely to face a cash flow problem down the track and rectify it.
So, don’t let the cash flow beast consume you. By making cash flow a top priority for your business you can tame the cash flow beast.
About the author, Rick Chisholm
As the Founder and CEO of InnovestSME, Rick Chisholm helps small to medium sized enterprises (SMEs) achieve and exceed their business goals. Rick draws on his 30-year career as a serial entrepreneur and business leader to help SMEs destined for success, but held back by circumstances, make their vision a reality. Unlike many other business coaches, he actually walks the talk – he has started and grown over 28 SMEs, including the Lightsounds Group of Companies, Macquarie Business Consulting, Master Coaching International, Australian Education Alliance and The Australian DJ School, and turned over in excess of $300 million.