What does it take to Scale Up a Business – Part Four: Having Enough Cash to Weather the Storms

Cash Flow refers to the flow of money in and out of a business, and having a healthy cash flow is essential for a business to be able to meet its financial obligations and invest in growth. It can easily overshadow the other three decisions (People, Strategy, Execution) when not properly managed. Cash is the oxygen to your business, without having the ability to operate on a day to day basis, it can stop your business in its tracks.

“Never take your eyes off the cash flow because it’s the lifeblood of business.”—Sir Richard Branson, business magnate, investor, author and philanthropist

Using the Scaling Up methodology, we encourage companies to calculate their Cash Conversion Cycle (CCC). This means measuring how long it takes between when you spend a dollar (marketing, design, rent, wages, etc.) until you get that dollar back.

There are a number of key steps that you can take to ensure that you have enough cash flow to weather the storms. 

Let’s take a look at these below.

Essential Cash Flow Management

There are a few basic (and essential) aspects of managing your cash flow. These include setting financial goals and targets for your business, as well as developing strategies and tactics to achieve those goals. Business growth does suck cash from day-to-day operations.

Having a clear and actionable plan will allow you to manage your cash flow and maintain a strong financial position.

Next, it’s important to carefully manage your cash flow by tracking your income and expenses, as well as managing your accounts receivable and accounts payable to ensure that your company has the financial resources it needs to operate and grow.

You should also maintain a healthy balance sheet, with sufficient assets and liquidity to meet your financial obligations. Manage your debt to ensure that you are able to service your repayments without putting undue strain on your cash flow, and to have the financial resilience to withstand market fluctuations and other challenges.

Something to take note of is to ensure your Leadership Team is financially literate so you can assign ownership and accountability to them for certain aspects of your P&L. 

Key Cash Flow Questions:

• Do you know how much cash is needed to fund your growth during the next 3-5 years?
• Do you understand where the money buckets are in your business? You may be making a profit – but are you producing free cash flow?
• How often are you looking at your profit and loss statement, balance sheet, aged debtors, aged creditors, cash-flow statement – do you really understand them? And how they have changed from period to period and why?
• Do your people know how the company makes money? Teach them so they know what the drivers are that they can influence.
• Do you have a person accountable to each line item on the P&L and balance sheet? 
• Do you know the 7 key variables that are in your control that impact Profit and Cash flow? We call it ‘The Power of One (1%) – just a 1% change in just some of these variables can have a dramatic impact on profit and cash-flow – up to 100% improvement.
• How have your labor efficiency ratios changed over the past 2-3 years – company wide and by department? Many businesses throw people at growth and wonder why they are making less money than in previous years.
• What ‘Oxygen Tanks’ have you built to weather the next ‘storm’?

“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”—Michael Dell, founder and CEO, Dell Technologies

Prioritise Your Pricing Strategy

Pricing is a strategic decision and is often a neglected area of business, however it is a huge driver of cash flow (and profit!) Just as much emphasis should be put towards your pricing strategy as you have for increasing sales volume and generating cost savings.

How do you know if you are charging too much, or too little? The two most important aspects to consider when pricing are:

• How your customers perceive your value
• The profit level you need to sustain or improve that value

Also be careful when discounting your product or services. Although you may think you can make the difference up by selling a greater volume, often you will find you need more than a 3% increase in volume to make up for a 1% discount in price.

External Sources of Funding

It is also important for you to have access to external sources of funding, in case your cash flow is not sufficient enough to meet your financial needs. If this is required, are you investable and investment ready? 

Can you maintain a line of credit with a bank or other financial institution, as well as explore other funding options such as equity financing or government grants?

By having access to external sources of funding, you can ensure you have a financial safety net in case of unexpected financial challenges.

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” —Peter Drucker, management consultant, educator and author

By carefully managing your cash flow you can maintain a strong position with the financial resources you need to operate and grow, even in the face of market fluctuations and other challenges.

Strategy & Execution have a fantastic Financial Analysis Tool that we share with you, that details what is happening in the various parts of your business and what you need to do – Profitability, Working Capital, Other Capital, Funding for Growth, Sustainable Growth, Business Value, Power-of-One.

Talk to one of our Advisors today if Cash Flow is an area you need to develop. 

TED BONEL, SCALING UP COACH – STRATEGY & EXECUTION BUSINESS ADVISORS

Need assistance to help your team achieve your objectives to grow your business? Contact me at tedb@strategyandexecution.com.au to schedule a free 30-minute discovery meeting.

ABOUT STRATEGY & EXECUTION

We have been providing organisations and their leaders with facilitation support and executive education focused on strategy development and strategy execution for more than 20 years. Using business models such as Scaling Up, Exponential Organizations, E-Myth Mastery, Outthinker etc, we support organisations seeking to create or refine excellent strategies and execute them quickly and effectively.

Our expertise is based on a mixture of wide business experience, effective tools as well as a great deal of consulting and executive education. Our approach to working with clients is as unique as our specialist focus. We always seek to challenge our clients’ thinking – but equally are unafraid to roll up our sleeves and help execute the ideas we help generate. Learn more about us here or view our upcoming workshops and events.

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