All too often, I see businesses making tougher decisions than they want to, mostly because cashflow is suddenly and ‘unexplainedly’ tight, even though the business is showing a profit and sales are strong.
Running a regular health check on your business can help in times of uncertainty or downturn, as well as in times of growth and opportunity, smoothing out the cashflow to support the business throughout the year.
The key is to set a regular time (e.g. monthly or quarterly) to run through a checklist of key indicators to review the health of your business and act on any of the symptoms that will potentially lead to a cashflow shortage.
I use a regular business health checklist – usually 10 to 15 items – to review some hot points (key indicators) of a business, which work regardless of the industry. I’ll give you my top 3, but each business will also have health indicators that are unique to the business or industry.
“Even if you are on the right track, you’ll get run over if you just sit there.” – Will Rodgers
1. Reviewing the ability to collect customer/client payments on time
Chances are that if your collection days are getting out of control, then your cashflow is being impacted!
Some of the ways to improve this is to review your process and implement new and improved ways of following up customers for outstanding amounts. Simple things like making it easy for your customers to pay you (e.g. online with a credit card or PayPal) or automating the collection process using software (there are some really good features in apps out there that can make this easy), or offering a reward system for early successful collections. The rewards can be an incentive for further purchases.
2. Check your gross profit margins
Sometimes, supplier price increases and incidental ‘minimal’ costs creep into your margins without being noticed. Review your gross profit margin regularly so that you know when the margins are reducing and when it’s time for a price increase to ensure you are covering overheads and for the business to make a profit.
3. Review your pricing
Recently, I worked with a business to review pricing and I suggested they go to market to understand what their competitors were charging. The result was surprising. Competitors were charging at least $20 more for the initial call-out fee. The change was simple to implement and the result was a significant impact on the overall profitability.
Importantly, it’s not just about dealing with the negatives in a business, it’s also about keeping an eye on how positive shifts in operations can impact the business financially and how to take advantage of them.
To manage your business’ financial health, start by selecting a couple of key areas to work with and review the relevant metric on a monthly or quarterly basis. Once you get a good grasp on the first couple then add a few more until you build a financial health checklist. Review the list annually to make sure you stay on top of the metrics and update them where needed.
