Numbers are the language of your business. But if you can’t understand what it’s telling you, how will you know what it needs to thrive and grow?
In this article, you will learn three essential concepts to help you
- Improve your cash flow
- Increase your profit margins
- Accelerate revenue growth
…all through a better understanding of your numbers.
And don’t worry, even if you feel baffled by accountant-speak, we’re going to keep it very simple here.
In fact, there are just 3 key concepts to grasp – the financial control Growth Blueprints. Understand and apply these and your business will become far more rewarding.
Growth Blueprint 1: Properly Managed Cash Flow
Making the sale and producing invoices is only half the story of being in business. It’s easy to get into the situation of being very busy, selling lots of product, but having no money flowing into your bank account.
Effective cash flow management will ensure that customers pay on time, that stock levels are kept to a minimum without disrupting service and that your business always has sufficient cash on hand to deal with day to day expenses.
There are six common causes of cash flow problems
- Consistently operating below your break even sales. The break even sales figure for your business is the total value of sales required to bring in just enough profit to cover your costs of trading. If you operate below break even, your business burns through its cash reserves and runs out of money.
- Poor credit control. Despite strong sales, if you don’t collect the money that you are owed you’ll soon find yourself in trouble.
- Too many bad debts. An extension of credit control really, but if you take on customers who are in trouble, they may go bust before they pay you. Accumulate too many like this and your business will end up starved forever of cash for the services and products you’ve sold.
- Too much cash wrapped up in unsold stock. It’s common for stock levels to build up over the years and this represents cash that could be in your bank account. If you can’t sell it for a profit, look to shift it quickly, even at cost price or just below, because while it’s in your stock room, it’s simply dead money.
- Insufficient working capital. Working capital is the name given to the cost of the materials and resources you use while doing a job. For example, a builder needs bricks to build an extension to a customer’s house. If the customer does not pay until the job is finished, the builder has to cover the cost of the bricks for several months.
- You draw too much cash from the business! This final one is obvious and yet surprisingly common. If the business is not making sufficient income, you cannot keep drawing money from it. Find other ways to provide a decent income for yourself while you grow your business to the level where it can keep paying you.
Growth Blueprint 2: Robust Margins To Increase Profit Without Increasing Sales
If your business has decent revenues but little or no profit, the issue you face is poor margins. For example, a £250,000 turnover business where the owner earns only £14,000 per annum is a prime example of a business where margins are simply too thin for success.
Improving your margins means you make more profit from the same level of sales.
That means you either have to increase your prices or reduce your costs. While this sounds straightforward enough, in practice there are some quite different ways of achieving these ends.
Often the biggest hurdle to achieving better margins is the mindset of the owner of the business. If you are convinced that all of your customers would leave if you increased prices by 10%, then if your margins are already very thin, you perhaps need tp open your mind to some new ways of thinking.
Increasing your prices may involve a strategic shift in your business towards serving a higher-spending clientele. This also moves you away from head-to-head price competition with the rest of your market.[box type=”note”]Harrods don’t compete on price – they simply target the wealthy. What could you do?[/box]
Remember also that you could just eliminate discounts and increase your overall price without changing your business at all.
While many small business owners are terrified of increasing their prices, some clients have increased prices by 100% overnight and not lost any good customers; hard to believe, yet true.
The second way to improve margins is to cut your spending. Both the cost of the products/services you sell and the fixed costs like rent, phones, computer maintenance etc all chip away at your margins.
Simply finding new vendors, negotiating new deals, eliminating unecessary contracts, etc can all make a big overall improvement to your bottom line
Trimming 10% from your monthly costs is often no more effort than an afternoon looking through your accounts.
Download the Sales Forecast and Budget spreadsheet template to help you plan for increased gross and net profit from the Free Double Your Business Growth Club.
Growth Blueprint 3: Plan for Revenue Growth with Sales Targets and An Expenses Budget
Large businesses that are actively growing set clear sales targets and expense budgets to ensure that consistent growth is maintained while profit margins are held strong.
You can use sales targets to manage your salespeople and ideally involve them in setting the sales targets for themselves, with you just keeping them honest by making sure they don’t make their own lives too easy!
The budget plan is the flipside to sales targets and sets the planned expenses for each area of the business.
By planning what you intend to spend, you can keep in control of expenses and therefore have a very strong influence over the profit margins your business makes.
A regular review of sales figures, margins and overall business spending helps you to keep track of business performance and lift yourself above the role of simply running your business into effectively managing it instead.
When sales are slipping below target levels, ask your sales team for their analysis of what’s gone wrong and their plans to recover in the next month.
When product margins or expenses start to creep above budgeted levels, set staff the task of bringing the costs back down, or reallocating money from elsewhere in the budget so that your ultimate profits are unaffected despite the changes to the plan.