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  • Jeannie Doherty

The 7 Deadly Cash Flow Sins

Cash is king, and too many businesses go broke because of cash flow problems, primarily because they just don't really understand the levers that they need to pull to improve cash flow and they don't understand what it all means overall.

Ultimately, the way to improve your cash flow and your profitability overall is to pay attention to your numbers.

To sit down every month and read the story that they are telling you, and if you struggle with that then you may need some help. You can ask us for help, it's what we do best, but you're going to need to do it. You're going to need to pay attention to your numbers. Successful business owners do this, and you must do this too.

Business owners are always asking me, "Where's all the cash?" They simply don't understand why the bank account runs dry, why maybe they look profitable on paper, but there's no cash in the bank, and that's what we're going to look at now, and that's a question I would like to answer, where's all the cash?

The seven sins can be summarised as an acronym, and that is

SERPICO: Sales, Expenses, Receivables, Payables, Inventory, Cash at bank, and Owner drawings.

1. Sales

Sales is vanity, profit is sanity, and cash is king. Accountants love that saying, I love that saying, strategic bookkeepers love that saying. It is so, so true.

If you believe that more sales will fix everything, then you are committing this sin. More sales equals more sales, but not always more cash or even profit.

I have seen many businesses with millions of dollars in sales and no profit, or even turning a loss. I see this all the time. You'd be surprised. You may even be reading this and thinking, "this is happening to me. I'm struggling with profit, I'm making lots of sales," and if that is you, great, this will be really, really helpful. To avoid this sin, focus on profit first, focus on gross profit and net profit. Gross profit is the profit that you make from revenue minus cost of sale, so the things that you do to make the sale. And the net profit is right at the bottom, and that's after all expenses, so cost of sales and the operating expenses.

I recently helped a business go from zero to around 80K a month by getting them to stop doing so much sales, so much work, and focus on making the good work more profitable. I helped them focus on profit first, so they actually reduced their revenue and they INCREASED THEIR PROFIT. I mean, this is a subject I could go on and on about, but believe me now, trust me later. Implement, look at your profit and loss, there will be a magic that happens.

So, if you want a result like that, that was a big business, it was about 4 million in revenue, but as I said, zero to $80,000 a month. Yes, it took about six months, but we did the profit-first approach. We reduced sales and made more profit. Sales is vanity, profit is sanity, cash is king.

2. Expenses

You're committing this sin around expenses if you're not reviewing your profit and loss monthly and taking measures to REDUCE EXPENSES. Sounds pretty boring, but it is the pathway to great cash flow and more profit.

Reducing expenses like cost of sales and also operating expenses. We get massive wins for clients when we start this process with them, so rather than slogging it out and hustling and singing for your supper, generating more revenue, you can generate more cash and profit by reducing your expenses month on month.

Big wins always happen at the beginning, and then win after win when you keep paying attention month on month.

A big tip here is to look for subscriptions that you didn't even know existed. I could rant on about this one forever. In fact, someone I know was ranting about this recently, and I get it, I have been caught out by this as well. And in fact, in my bookkeeping practice we have this big cyber crime policy and policy around subscriptions, and sometimes my clients go, "Oh, really? Why do I have to follow this?" , "Because I want to save you money." I know how much money that consumers and business owners are losing when they make a purchase and don't realise that they have subscribed. Often, bookkeepers are cash-coating those expenses and it just leads to profit bleeding and cash bleeding out of the business. So, the key takeaway here is to sit down every month, look at your profit and loss, pay attention to your expenses and strategically reduce them.

3. Receivables

CASH FLOW PRESSURE happens in the gap between when your customers pay you and when you pay everyone else. That is like a cash flow principle. Cash flow pressure happens in the gap between when your customers pay you and when you pay everyone else. So if you're paying people before your customers pay you, you're going to have to find the money to fund that, and therein lies the cash flow pressure.

So, receivables, are your customers paying you on time? Do you have the best possible trading terms that you could have with your customers? Could you pivot to getting your customers to pay in advance, or on completion of job? Could you take bigger deposits? Could you take a credit card or set up direct debit systems to make paying easier for your customers and faster?

Do you have limiting beliefs and are you self-assessing the terms your customers are willing to accept? Because I say this all the time, I end up in a few arguments with my clients because they say, "No, no, no, my customers won't accept that," but when I ask them to ask their customers to pay up front, offer bigger deposits or whatever's relevant to them in their industry, whatever juice we can squeeze out of that orange, they are always pleasantly surprised. So work on your trading terms with your customers, and preferably get them to pay in advance, because they can use a credit card and then they're leveraging the bank and not you for a loan.

4. Payables

Following on from the cash flow principle that I just introduced you to, how can you pay out later to improve your cash flow?

How can you pay out money to the people that you have to pay it out to and the departments and the organisations later than you currently do to make any cash flow gaps smaller?

Can you negotiate better terms with suppliers?

Can you pay subcontractors and staff later?

You may be saying, "Say what?" That's a limiting belief. If you employ staff, you must consider implementing this cash flow friendly payroll system. And that is, you might be paying your staff weekly at the moment, a lot of business owners I meet, they might have, "Clock your time Monday to Friday and I'll pay you Friday afternoon," which is a cash flow disaster, or they might be like, "Clock your time Monday to Sunday and I'll pay you on a Monday morning," not much better.

And I can understand how that happens. You go into business, it seems logical, your focus isn't on cash flow, you're excited about starting a new business. But the payroll process or system that you need to adopt to have the best cash flow that you can is this.

You want to have a payroll calendar which is Monday to Sunday over a fortnight, a two week period. So your staff should be clocking their hours from Monday to Sunday over a fortnight, and the pay day should be on the Thursday after the close of the calendar. So you go Monday to Sunday over a fortnight, pay on the following Thursday. This will add up to 10 days of cash flow to your business. It's massive.

I do recommend that you give your staff three months' notice and do a countdown reminder every week when you pay them. So just tell them, "This is going to be a change to the payroll." You'll get some grizzling, 80% of them will be fine, 20% will need a bit of help, remind them every week when you pay them, and that change alone will transform your cash flow if you employ staff. And remember, this is about closing the gap between when your customers pay you and when you pay everyone else. The smaller the gap, the less money you will have to fund personally to fill that gap.

5. Inventory

Do you buy and sell any kind of thing, like inventory? This sin relates to paying your suppliers before your customers pay you for the things, for the stock, for the inventory, which relates to stock turns and supplier trading terms.

So with regard to stock turns, if you've never heard that phrase before, really it's about is stock sitting on the shelf too long? Too long after you pay the supplier. So it's about how fast you turn that stock over. You need to turn your stock over quickly, or you are going to need to face the fact that you're going to need to fund the cash flow gap personally. That's how you run out of money. Where's all the cash?

The answer is in all of these sins that I'm telling you, you end up having to fund the gap that has been created by committing these sins. If you buy and sell inventory, it's in your suppliers' best interest to help you trade. In fact, they're your partners, so talk to them about better terms, because your success is actually their success.

6. Cash at the bank

Maybe my favorite sin, only because when I can get business owners to really understand this sin and stop committing it, I feel like it's step one to just everything changing. So, this sin is committed when you're running your business on the bank account, which is a funny phrase, but what it means is that you're looking at your bank balance to assess how your business is performing. And if you're doing that, I'm not going to sugar coat it, it's a fast track to failure. And I do see the result of this sin being committed quite a bit. Breaks my heart. So, businesses with cash reserves that are actually broke and they don't even know it.

What I want to say right now is to avoid this sin, you're going to need to judge your business's performance by looking at your financials, so your profit and loss, your balance sheet, and every other part.

7. Owner drawings

Because you're also going to need to make sure that you're not overdrawing. We see this one all the time as well, because just remember statistics around business are that 80% of businesses will just shut up shop within their first five years. And what I'm telling you now is the why.

So if you are not on your own payroll, and sometimes there's a really good reason for that, it can be the structure that you're trading out of, then you will be just drawing money out of the business to like a wage, but it doesn't go through the payroll.

When you just simply draw money out of the business, it actually shows on the balance sheet, which is getting quite technical, but it doesn't show on the profit and loss. So even if you're looking at the profit and loss and you're like, "Yay, there's net profit there," are you drawing out of the business as a wage for yourself more than the net profit? If you are drawing out around the net profit, just remember you're going to have to reserve some money for any assets you need to purchase, and repairs and maintenance as well.

Overdrawing is a deadly sin, for sure. When working with a client investigating their numbers month on month, they told us that finding out that they were overdrawing was one of the most impactful things. They had no idea they were overdrawing, and finding out that they were overdrawing meant that they could take action, which we then held them accountable to.

That is your seven deadly sins. There is one key thing that can make or break your ability to improve your cash flow with these strategies that I have shared with you, and that is your mindset.

You need to think like a successful entrepreneur and act like a successful entrepreneur to be a successful entrepreneur.

So, what I hope you will think is, "You know what? I can do this. If I play the long game and implement step by step, I know I can do this." And then, like Nike says, just do it. Be prolific, not perfect. Imperfect action that moves the needle is better than no action at all due to being a perfectionist.

And because I believe in the value of providing business owners the ability to secure more TIME, MONEY and FREEDOM, here's your FREE ebook of The 7 Deadly Cash Flow Sins.


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