Cash flow. It is the backbone of your business. If you don’t learn to manage the money coming into and leaving your business it is nearly impossible to be successful. Just because you have a positive bank balance this week does not mean that you can afford to spend it on the latest and greatest new gadget. You must focus on the big picture, which at times, can be difficult to do.
In order to understand cash flow you need to understand what goes on behind the scenes. Imagine for a moment that we live in a perfect world. In this world:
- Using available cash, you purchase quality supplies from your vendors and turn them into your finished product.
- Your customers purchase that product and pay for it on time.
- The payment from your customers allows you to pay your vendors, order more supplies and pay yourself.
Unfortunately, this is more what it looks like:
- Using credit, you purchase supplies from your vendors, not necessarily the best supplies, because hey, the vendor was having a sale & these supplies will do. You turn them into your finished product.
- Your customers purchase that product and don’t pay their invoice in a timely manner.
- 30 days later, you don’t have the cash you need to pay your vendors and suppliers, but you need more product so you put the balance due to the supplier on a credit card and order more product, because you cannot sell more if you don’t have it available.
- You know your customer is late paying but has always paid before so you put their invoice on the back burner because you don’t want to call and “offend” your customer.
- Your late/non-paying customer comes to you and says they need more of your product. They’ve had a bit of a cash flow problem and could you just float them on the invoice for a few more weeks. Just add the new product to their balance. Not wanting to lose a “good” customer, you agree.
The vicious cycle starts again. Does this sound familiar to you?
There are many components to cash flow that I’d like to address. I’ll be blogging about each one of these components in detail over the coming month.
- Suppliers and vendors: am I using the best, most cost effective suppliers for my business? Notice I did not say cheapest. Do they ship on time? Do they deliver what I need?
- Customers: am I keeping dead beat customers because they are “good” customers? Do my customers pay on time?
- Employees and Consultants: do they understand the vision and focus of my business? Are they promoting my brand in a manner that I support?
- Your business: do you pay your bills on time? Are you delivering your product on time? Are you delivering a quality product? Are you ensuring that your employees and consultants understand the vision and focus of your business? Are you able to take a salary?
In order to write blog posts that resonate with you, my customers, I’d like to know what issues you have with cash flow. Please leave a comment or send me an email and I will address these concerns (anonymously, of course!) I look forward to going into more detail about this soon!