We’ve all heard the old adage that turnover is vanity, profit is sanity and cash is king.
But if cash is king, is it ruling in your business?
The point is that a lot of businesses are in a situation where their cashflow is ok – they’re not on the brink of failure, but they’re not actually generating cash.
But being a cash generating business is very important – you can read why in more detail here.
It’s about much more than just surviving and being able to pay your suppliers on time – it’s about making your business worth more when you ultimately come to sell it or pass it on, so you get the deserved reward for the work you’ve put into your business. In the meantime it means you can be less reliant on banks and other external financers, and you can properly support the people and causes that you care about.
It’s worth some more consideration. How can you make your business cash generating? Here’s a 3 step plan to help you:
Assess your business model
First thing to do here is to step back and assess your business model to check up on the fundamentals. There’s 3 critical factors you need to check your business against –
- Are you making enough true net profit? Pull out your latest management accounts and check, and make sure you’re assessing your real true net profit, after drawings and tax provision - is it coming out at 8%+? If not, you need to improve your overall profitability as a business in order to become a cash generating business
- Are your loan repayments more than your true net profit? If so, you’re not breaking even, and you need to focus on getting above breakeven urgently.
- What is the margin between your working capital % and your gross profit %? If your GP% isn’t 5 – 10% higher than your working capital %, then you need to get more efficient with your working capital (i.e. stock, debtors and creditors)
Find out which products are generating cash and which are consuming cash
It’s really important to drill into your top 10 product lines to find out which products are generating cash and which products are consuming cash. Once you know that, you can then work on a plan to fine tune the product line to make it a cash generating line.
Set up a plan to generate cash
Bearing in mind what you’ve found in steps 1 and 2, you need to set up a financial plan that ties together all of the elements in your business, and make sure you focus on:
- Having a GP% strategy – drill into your GP% and don’t just accept it as it is! Come up with a plan to increase your GP% by just 1 or 2%. If you’re GP% is less than 30% you’re really going to struggle to be a cash generating business, but the higher your GP the easier it will be
- Setting overhead budgets rigorously – be rigorous with your costs, make sure you cut out waste (read our article on this here)
- Don’t accept a low true net profit – don’t stop until your plan shows a true net profit of 8%+
- Break your plan down into a month by month forecast – once you’ve got your overall plan clear, break it down into a month by month cashflow forecast so you can see the month by month variations / trends
While there’s no overnight formula to becoming a cash generating business, following this 3 step plan will get you well on the way there. We believe every business can become a cash generator, it’s just a question of stepping back to check up on the fundamentals of your business model, and then drilling down to fix the parts of your business that are consuming cash and setting a go forward plan.
When all’s said and done, you get the reward – an efficient, stable and valuable business.