Have you ever experienced problems keeping cash in your business despite increasing sales?
If yes, then your business may have become a cash-consuming black hole.
In this cash flow management story guide, I am sharing how I worked with a beauty parlor business to go from cash crisis to complete cash control.
From my experience working with entrepreneurs over the last two decades as a cash flow advisor based in the UK, entrepreneurs often face cash flow challenges of managing cash flow.
It happens because as you grow your business, you need to invest in:
- Hiring people like VA, bookkeepers, accountants, and other employees
- Space for meetings and events at times
- Marketing to keep your brand relevant and ads to drive traffic
- One-off costs like new computers, office supplies
Before you know it, your fixed expenses jump. And your business starts bleeding cash.
In the beginning, it feels manageable. But when a business cannot sell enough to cover increasing expenses, it gets out of hand. This hurts cash flow badly.
So, if you are facing similar cash flow challenges and want to get inspired and implement practical steps to improve business cash flow and the value of your business, then you are in the right place.
As an professional qualified Chartered Certified Accountant working with various sectors based in the UK over the last two decades, I advise my clients who are small business owners and entrepreneurs to manage their cash flow effectively so that they can build a sustainable business.
You may have across my articles, masterclass on the leading global sites like Independent, Zoho, FloatApp.
Let’s dive in.
Understanding Cash Flow Management Challenge During Business Expansion
To understand the cash flow challenge, I will share the cash flow story of an entrepreneur with you.
This story will teach you to manage cash flow better during business growth so that one day, you can also build a successful financial story you want to share with the world.
The Initial Situation
In Feb 2020, a new client, Kay, approached me via a mutual connection. She has a high-end beauty parlour business based in Putney, London.
Our conversation went like this:
Kay: “Shishir, I have made money in my business, and still my business is about to go bust.”
Shishir: “What do you mean, Kay?”
Kay: “Well, I have made money, but also I haven’t. My clients owe me £57,550. I need to pay my staff and suppliers £27,950 this week, and I don’t have the cash to do that. My sales have grown every quarter for the last six quarters, and I still struggle with cash flow. It’s a nightmare. Can you help? What should I do?”
I’m sharing an updated and structured version of what I told Kay in this section.
You will understand the relationship between cash and business growth by this end.
You will also learn best practices you can implement for smooth business growth.
Let’s start by understanding how cash and business growth are connected. Then, I’ll try to share more than what you intuitively know.
How Business Growth Can Worsen Cash Flow Issues
As business grows, the demand for cash flow grows as they need more cash to cover business operations such as hiring new staff members, business management teams, etc.
The same happened with Kay, whom I mentioned earlier.
She had £57,550 as a debtor but needed to pay £27,950 towards salaries and suppliers in one week. However, her debtors wouldn’t have settled in one week, as the balance was not due yet.
Strategic Cash Management Solution For Sustainable Growth Implementation
If you are curious about how we could solve Kay’s cash flow problem for her specific situation, then continue reading.
I am sharing where she was, what we did, where she is now.
At the beginning of this section, you saw Kay, despite her business being on a growth trajectory, was strapped for cash and struggling to pay her staff and suppliers.
If only she knew what I am sharing below, she wouldn’t be having sleepless nights, headaches, and fear of losing her best employees and possibly going out of business.
We will look at her specific situation, what we did together using a 7-step process to solve the cash flow problem, and see where she is now.
For context, Kay’s business is profitable and growing, but she doesn’t have the cash flow to justify the profit she is making. That is why she is struggling to pay her suppliers’ salaries.
Steps That Got Her Out of a Tough Cash Flow Situation
Here are the steps we completed to get her out of a tough cash flow situation.
STEP 1 | Established Kay’s Current Cash Position
We did it by preparing a cash flow statement.
Establishing the current cash position is the first step you should take if you want to get over cash flow problems. But this is not what a struggling entrepreneur does. Instead, she looks at her current bank balance first.
We looked at her cash runaway and found out that she is not even covered for one week. So you have a healthy cash balance when covered for at least the next 12 weeks.
STEP 2 | Communicated With Suppliers to Let Them Know of Payment Delays
Some of Kay’s suppliers are small operators. They rely on payments from her for their day-to-day expenses. So it was essential to pay all suppliers as soon as possible. To ensure their work and life are not disrupted, we avoid long payment delays. So instead, we communicated that payment would be delayed by 14 days.
Thanks to clear communication and expectations, they were okay to wait for an additional 14 days. It wasn’t too tough. After all, they realize the importance of Kay’s business as they were invested in her success because their business is also directly affected by it.
I call it the cousin share theory, where a small cousin is affected by a big cousin situation. If one business grows, then the business that depends on it increases and vice versa.
STEP 3 | Prepared Profit and Loss Report and Cash Flow Projections to Approach Banks
Kay wasn’t sure about this.
She told me, “Shishir, I don’t like debt. It makes me anxious and worried. I have always run my business on what I have.”
I replied, “Kay, we have to understand that there is good debt and bad debt.
You have good debt when you make more than what you pay as interest by using debt.
You have bad debt when you don’t get any return or are lower than the interest paid.
And, most business debt that you use to grow or save your business is good debt. Because once your business is on track, it is an income-generating asset that continues to give for a long time.”
Good and Bad Debt is one of the principles that I teach in my The Entrepreneurs Wealth Accelerator Program, and one of the modules is called The C. A. S. H. F. L.O.W. CHAMPION, where L stands for Leverage. So, to become a cash flow champion and scale your business, leverage someone else’s cash.
To use leverage to Kay’s advantage, we approached a few banks to give us the best deals. Within two weeks, we negotiated an overdraft facility rather than a loan. We went for an overdraft over a loan because we knew we only had short-term needs, and we got it at a good rate of interest of 2.25%.
STEP 4 | Ensured Effective and Efficient Credit Control
Every Monday, Kay looks at the list of debtors who owe her. Then she delegates an associate to follow up to ensure timely payment.
With credit control in place, Kay could match future cash inflow to a future cash outflow and never had to be in the current situation of having profit but no cash to pay suppliers, salaries, etc.
STEP 5 | Did a Bi-Weekly Payment Run
To arrive at this position, we set up an internal process to invoice clients at the end of the month every month and followed up with clients to confirm they have received the invoice and make sure it is scheduled for their next payment run.
This information helped her organize and match future cash outflow to make payments to her suppliers based on timing and the amount of cash inflow.
STEP 6 | Projected Cash Flow For Next 12 Weeks
Once we prepared a cash flow statement for the last three months, we started to see some cash IN and cash OUT. It gave us an idea to start projecting future cash flow. With cash flow projections done, Kay could visualize what her future cash position would look like today.
She said, “Shishir, now I know whether I can afford to go on a holiday a few months from now, without worrying about having enough money to pay bills once I get back. I never had this level of clarity.”
STEP 7 | Recommended Diversifying Her Client Base
Kay operates a high-end beauty therapy business, and her clients are wealthy people. Still, we suggested having a diverse mix of clients or products. So if a specific segment of clients does not buy for whatever reason, she can tap into other customer segments or products.
She could sell makeup products and partner up with other businesses operating in other locations to act on this advice.
Let’s see where she is now after completing these seven steps.
Kay’s Journey: From Cash Flow Crisis to Cash Flow Control
Where Kay Is Now Running a business
Kay is much happier now. She feels in control of the situation and doesn’t have sleepless nights anymore.
She said to me, “Shishir, I’m now at peace as I have clarity, control, and confidence, which was lacking before.”
I am happy for Kay because now cash flow problems will no longer occupy a big space in her mind, and she can focus on good things both in business and in her life.
I hope Kay’s story and the cash flow interventions I shared above gave you enough ideas to do the same in your business.
How Kay Is Managing Cash Flow For Scaling Up
We came with a customised cash flow management model for her to come up with the followings:
- Monthly closing cash balance Target- Every month she was given a minimum cash balance required to at least cover the next 13 weeks overhead expenses and taxes that fall due
- Free Cash Flow Generation- Every month we identified free cash flow to re-invest in business growth.
We set up the routine and process in place to ensure cash flow statement is prepared on a timely basis to measure financial performance for her.
Kay is now scaling her business growing by 15% every quarter.
Lessons Learned From Kay’s Cash Flow Woes
She has learned her lesson, not to run , before she can walk, and not to walk before she can crawl.
Here’s the thing.
Financial stability is more important than financial scaling.
If you are in a similar situation, I am sharing cash flow management best practices to avoid the usual challenges in business growth.
Best Practices For Cash Flow Management
When growing your business, you need a solid financial foundation. Otherwise, your business may not survive for long, as 90% of businesses do not survive more than five years, out of which 82% fall short because of cash flow problems.
To make it work to the other side of 18%, always have a grip on your cash flow.
I am sharing five best practices that will help you do that.
1. Prioritize Cash Generating Activities
Cash is more important than profit when scaling.
Profit is worthless when you struggle to pay your employees, taxes, and yourself.
So prioritize cash-generating activities. Before doing anything in business, ask yourself, “How will this affect my cash flow?”
2. Know Your Numbers
Do you know one of the reasons why Warren Buffet is so successful?
He reads financial statements and researches to know all about the company he wants to invest in. By the time he completes his research, he will probably know more about the company than the company’s CEO.
You can replicate similar results when you know the numbers in your business. Because when you are on top of numbers, you can measure the metrics that matter and seek to improve them.
If you can’t do it yourself, get someone in your corner, like a financial coach, who can help you with it. It will pay you dividends in the long run.
3. Have an Overdraft Facility in Place
Have it even when you don’t need it, and have a cash-rich business. You never know when you need cash, and you may not have sufficient time to get it at that time.
An overdraft comes in handy in those times. With an overdraft, you only pay interest when you use the money available to you.
4. Diversify Your Customer Base
During March/April 2020, when COVID-19 struck most countries, many service-based businesses that relied on a few big clients struggled because their clients struggled.
So don’t put all your eggs in one basket. Instead, diversify your client base either based on geography or industry. With this, even when some clients drop out, you’ll have revenues coming in.
5. Project Your Cash Flow
Do it every week or every month. How often you do it depends on the scale of your business. By projecting cash flow, you can see your future in 3 months’ time today. This helps you make changes and plan for what’s coming up as necessary.
Building Your Cash Flow Story
If you would like to implement customised cash flow management model, so that you can build a cash rich business, then you can book a cash flow diagnostic call with me. You can also connect to me in my community group- Hungry Cash Flow for more case study stories.
