Understand your cash flow and grow your profits
by Business Money Today - November 2, 2009
Several years ago when I was a commercial lender, I met a young lady with an outstanding business. She and three partners were providing home healthcare services in their immediate and surrounding area. She came to me in search of a working capital loan as the business, while making over $100,000 per month, was struggling to pay all of its bills.
After spending some time with her going over the business and its financials, she came to the realization (something that I was trying to demonstrate to her) that she did not really understand her cash flow.
While she was pretty astute regarding the revenue that was flowing into her business - she had no idea where that money was going or for that matter what those funds should be used for.
An example, they recently accepted a contract for services at an assisted care facility that paid them over $20,000 per month. However, the service location was some 60 miles from their home office. After several months into this contract, she could not understand why they were struggling to meet payroll and other bills.
What we quickly determined was that while the $20,000 per month income was great - it was costing the company over $30,000 per month to service that contract due to travel and transportation cost as well as payroll, insurance and overhead. You would not believe the shock on this young lady's face once that comprehension set in. Until this point, she had only ever looked at the top line revenue number of the business in general and never once thought about venturing deeper into her financial numbers - especially matching revenue per job to costs per job.
The lesson here is that all business owners really have to understand what the cash flow inside their business is doing - especially growing businesses that, time and time again, grow themselves broke in part because they do not understand how the individual costs associated with each dollar flows through the organization.
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Understanding your business finances is as simple as creating a financial reporting system that is easy to understand and provides relevant information. Examples of relevant information could be as simple as (just for starters):
- Which customers are paying and which are not to include who is paying late.
- What each customer or contract or product is costing the firm (variable costs either per product or per customer).
- General overhead of the business and its trend.
- Profit margins - is there enough profit (revenue above variable costs) to cover overhead, taxes, interest, etc as well as provide a cushion for the business to pay owners, investors, other stakeholders or to be simply plowed back into the firm for growth and development. Not to mention the healthcare costs that will soon be mandatory.
Now, if you do not have the financial or accounting wherewithal to create your own financial reporting system - there are many accounting software products that you could easily incorporate into your current operating systems. There are some very simple programs that are free for business owners but require some level of account knowledge to manipulate the inputted data and extract information as needed. There are also some commercial programs that are quite expensive but really take a lot of the burden off the business owner. And, lastly, there are some in between.
Regardless of what you use - do use something! The alternative is to ontinue to lose both time and money wondering where your business is headed - up or down and what your money is doing (you want it working for you - not against you).
These systems, whether created or purchased, really do pay for themselves. As my example above outlines, had this young lady and her partners had a better grasp on their business finances, they would have never agreed to that $20,000 contract (either asking for more money to service the contact or just declining the offer and putting their efforts into a more profitable direction) and surely would not have been in my office asking for money to meet their daily expenses. (Keep in mind that since they agreed to a two year service contract - they had to continue to service that assisted care facility while they lost over $10,000 per month doing so).
The moral is that knowledge and information are power when it comes to the finances of your business. Understanding your company's cash flow can help you avoid situations like the one described here as well as give you more tools to ensure that you are taking your business in a most profitable direction - which is the goal of any business owner - to make as much profit as possible.
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Understand your cash flow and grow your profits - Business Money Today