[00:00:00] Poor cash flow is one of the biggest reasons why small businesses go under. What I see happen to a lot of businesses is they're not aware of the amount that they need to be putting aside for the A TO. That's what we would look at as a temporary cash flow problem, but there are also businesses that have chronic poor cash flow and it's bloody stressful. I want you to have amazing cash flow. And I can help.
Intro
if we want to be able to tip the scales towards the favor of marginalized people. We need to understand the secrets to making money in small business. The more we talk about money and the secret. That usually stay at the golf club, the more likely we are to be able to make money.
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Acknowledgement of Country
[00:01:00] This podcast episode was recorded on the lands of the Warri people of the KU Nation.
And I'd like to acknowledge them as the traditional owners and custodians of this land and water that I live, work, and play on. I'd like to pay respects to elders both past and present. And note that sovereignty has never been seeded. This always was and always will be. Aboriginal and Torres Strait Islander land.
So today I'm gonna give you five ways to improve your cash flow. But before we jump into that, I'm Fee Johnston. I'm a chartered accountant, a money coach, and a business strategist, and I'm obsessed with small business. I've been working in this field my whole career, and I absolutely love how small business owners can change the world.
And in order to do that, we need to be making money and we need to have positive cash flow. So let's talk about five ways to improve your cash flow. But [00:02:00] first, let's talk about what cash flow is. So cashflow is literally how much money is going in and out of your bank account each week, month, year, in your business.
Ideally, we want to have more money coming in than going out in our business. That's kind of the point from the financial perspective of your business, is that we want more coming in than we want going out. Now, depending on your business structure, that may be, uh, less or more important. So for example. If you are a sole trader, then your business exists to pay you a wage.
So we are not really looking for you to have a lot more coming in than going out other than making sure that we are paying you a great wage, that you have money for the A TO when it needs it, that you have money for your expenses and you have a little bit of profit as well. So what we ideally want is that there is, you know, at least a little bit more [00:03:00] coming in than going out as long as you are paying yourself well from your business.
If you are a company or you are an employer, especially if you are a company who's also an employer, we actually need money to be building up in your bank accounts. We need to make sure that there's enough money to secure future payroll. If you're employing people, then it is your obligation as an employer to make sure that your business is solvent and liquid, and that you are able to pay your bills as and when they fall due, including future wages, superannuation, ba, all of those things.
So to recap, cashflow is about how much is coming in and out of your bank account. When I talk about net cashflow. That means the difference between the two. So positive net cash flow is where you have more coming in than going out. And negative cash flow is where you have less coming in than going out.
I also wanna [00:04:00] explain that in some businesses, especially seasonal businesses, sometimes there's more coming. In than going out. And sometimes there's more going out than coming in. Now there's nothing wrong with having negative cash flow sometimes as long as that. Most of the time you have positive cash flow.
And during those times when you have more going out than coming in, that you are able to survive those times. So that's what cashflow is. Now let's talk about what poor cashflow is. So the sort of reasons that. Cashflow or the ways that poor cashflow can result in a business going under is essentially that we don't have money for the things that we need.
So it might be that as your business is growing, you are just not able to keep up with the amount of expenses that are going out. What I see happen to a lot of businesses is they're not aware of the amount that they need to be putting aside for the A TO. [00:05:00] And so they think that everything's going fine, and then all of a sudden there's a 10,000, a 20,000, a $50,000 bill that appears from the A TO, and you just don't have the money there to cover it.
That's what we would look at as a temporary cash flow problem where something comes up, it shocks you, you are able to get past it and move to having better cash flow in the future. There are also businesses that have chronic poor cashflow, and there are a lot of businesses out there like this where they are constantly robbing Peter to pay Paul.
There are constantly cashflow issues. There never seems to be enough money to pay all of the bills when they're due. You're constantly having to negotiate payment arrangements That is a business with a chronic cashflow problem as opposed to a temporary one. So let's talk about these five ways that you can improve your cashflow.
Number one, pay attention. So we can't [00:06:00] fix something that we're not paying attention to, and I get it. It is really tempting to want to ignore your poor cashflow. It feels in the moment like the best thing to do is hide your head in the sand and hope that your cashflow problems will somehow go away.
Unfortunately, that is not how cashflow problems work. The longer that we ignore them, the worse they get. So the first way to improve your cashflow is to start paying attention to it. That might mean something as simple as getting at your bank statement for the last couple of months and having a look at what is going in and coming out.
Are you actually aware of what's going out of your business each week or months? Do you have a number in your head to help you understand how much needs to go out of our bank account each week or each month, and am I actually able to make that much coming in? Another way to have a look at your cash flow is to look in your [00:07:00] bookkeeping system.
Now in Xero, there's a report called Cash Summary, which is a great report. You can look at it on whatever date range you want to. You can look at a daily, weekly, monthly, or yearly. You can compare months to each other. You can compare years to each other, and it's a really good way of trying to understand how much is coming in and going out of your business.
It's broken down into a couple of different components so you can see what's ordinary cash flow, so cash flow that's coming in and out of your business for kind of business as usual stuff. And then there's often other sections in your cash summary where it might show you the amounts coming in and going out to the A TO, maybe to employees and super.
And you might also have a section for where you might be paying down loans or buying equipment or those sorts of things that are out of the ordinary. So how do we pay more attention to our cash flow? We either start looking [00:08:00] at our bank statement or we start looking at our cash reporting within our bookkeeping system to make sense of how much is coming in and going out.
The second way that you can improve your cash flow is to increase your pricing. So when was the last time you did a price rise? Are you clear that the price you are charging is enough to cover the products and services that you are delivering? Have you forgotten to put your prices up for a couple of years and your costs have increased, your competitors have increased their prices, but you are still sitting at the same price you were at two or three or five years ago?
That is a very fast way to go out of business, not increasing your prices. So if you haven't increased your prices for more than a year, you need to put them up immediately. If you are somebody who does incremental price rises, then I want you to really look at, am I actually getting the right [00:09:00] price for the amount of value that I'm delivering here?
Am I competitive compared to. Other companies offering similar services or products? Am I charging what the market is willing to pay? And am I actually positioning myself as the right kind of business? So if you tell me that you are looking for premium prices, but your website looks like dog shit, and your social media is inconsistent.
Flappy. Then you need to actually go and look at how do I present my website, my social media, or whatever your external facing marketing is. How do I present myself as a premium business so that I can charge the premium prices that my products and services warrant? If you are a, a complicated business and your pricing is complicated, do you actually have the right methodology?
Or the right systems to calculate [00:10:00] what your prices should be. So are you looking at the amount of time it takes to deliver a particular service? Are you looking at the cost to produce a particular product? Are you actually capturing your operating expenses within your prices? A lot of businesses know what their gross profit is or what their gross margin is, but they haven't factored in their overheads or their administration and running costs into the pricing for their product. So your pricing has a direct impact on your cash flow.
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The doors to the club are open right now, so if you are keen to join, the time is now. The, [00:11:00] the third way that you can improve your cash flow is by having a system to manage it. I love using Profit First, but there are many ways that you can do this. So what systems are you using to help you manage your money?
Something that I have seen over and over again is that the businesses that are the most financially successful in the long term aren't necessarily the ones that are making the most revenue, but they're the ones that are taking the best care of their money. So this applies to us in our personal lives as well, in our personal finances.
We all know that friend that somehow manages to have, you know, really amazing savings and always has money for the things that they want to when they want them, even if they're not earning a huge salary. So understanding how to manage your money is a key part of improving your cash flow. So. I talked about [00:12:00] Profit First Before.
Profit First is a book that you can go and read by Mike Malowitz. And essentially the concept is that we decide in advance that we want all of our income to be profitable, and we work out what percentage of our income we are gonna spend on different aspects of our business. So that might be people costs, operating expenses, profit, and the A TO.
So you get to decide how you manage your money. Profit first is a great way of doing it, and essentially it is having separate bank accounts that you use for those different purposes. So you always know what budget is left for all of those different buckets in your business because you're separating your money when it comes in, rather than just spending it from one big bucket and then having no idea.
What you're supposed to have put aside for the A TO or for super or not, realizing that you haven't actually [00:13:00] paid your bills yet. Having your income split into different buckets helps with money management, so much recapping. The third way to improve your cash flow is to be really conscious about how you are spending and managing your money.
Preferably using a system like Profit First where you separate your income into different buckets so that you are much more intentional and aligned with how you are spending your money. The fourth way that you can improve your cash flow is something that may seem counterintuitive, but it's actually to slow down the growth of your business.
So what I see is when businesses grow too fast. Lots of things break including their cashflow. And the reason that happens is because for most businesses, the costs of growth come before the income. So let's say you're a service provider and you, you [00:14:00] make your living by getting your team who you pay to do work for your clients who then pay you.
You need to pay wages every single week or every single fortnight to your team. Regardless of whether or not they are bringing in an income for you. So between the time of you paying for the wages and the client then paying you, that little period in between can get very hairy. Same is true for product-based businesses and even more so if you need to invest large amounts of money in buying your product or manufacturing your product.
And that might be 3, 6, 9, or 12 months. Before you can actually sell that stock, you've got this little bit of time between paying for the stock and being paid for the stock where your cashflow is likely gonna take a really big dip. So this is why I recommend that businesses try to be [00:15:00] really steady about how they grow their revenue.
It's not because I'm trying to get you to slow your role. I know how exciting it is. To have your business grow and to be seeing your revenue growing and everything to feel like it's going really well, but you are entering this kind of valley of death if you grow too fast. And so what I want you to consider is what is the level of growth that we can afford with our cash flow?
If we look forward, let's say if our costs were to grow, could we handle that increase in costs? For three months before the income comes through. If you don't have that three months runway for those additional staff members or that stock that you need to bring in, how are you going to manage the time between paying for it and you being paid?
Right. Generally, my rule would be that I like to see businesses growing by 25% [00:16:00] per year or less. You can grow by more than that for one or two years in a row. If you are continually growing every year, your cashflow is going to be constantly tight. Your profitability may look fantastic on your profit and loss report, but it's not seeing the fact that you have already paid for this stock 12 months ago and you still haven't sold it yet, or that you hired an incredible team member, but they aren't actually doing client work yet, or they're doing client work, but the clients haven't paid.
That work yet? Okay? So growing by a kind of reasonable amount per year rather than trying to double your revenue is going to really help your cash flow to not get too strained. Another thing that happens when you grow really fast is all of your systems will be tested and they will break. So you might find that your client onboarding works really well [00:17:00] when you have 20 clients a week.
When you have 50 clients a week, all of a sudden that onboarding process falls apart. It might be that your customer relationship management software just absolutely cannot handle the amount of inquiries coming in. Your phone may be running hot, and you just do not have the manpower to be able to handle all of those inquiries.
Things start to slip. When things get busy. So you'll find that if your systems aren't capable of maintaining or managing that growth that you are experiencing, your team members will start making more mistakes. Things will start slipping through the cracks. Clients won't be invoiced, or payments won't be getting received, or you know, there'll just be things that aren't happening in the business because everything feels so busy and chaotic.
And one of the first things that starts to take a hit when a business is growing too fast is the cash flow. [00:18:00] So the fifth way that you can improve your cash flow so that you don't end up being a small business that goes out of business, is to think about having multiple types of, uh, revenue dropping into your bank account.
So I like to think about fast, medium, and slow money. Fast money is the sort of money that you can get into your bank account immediately or within seven days. So depending on the type of business that you have, that might be a 90 minute brainstorm session. If you are a solo consultant, it might be releasing a uh, special sale through your eCommerce business.
If that's where you are at, something that's gonna get quick money into your business within seven days will be the sort of thing that can help you. When you are waiting for your other income to land, the second type of, uh, money that I talk about is medium money. This is your business as usual money. [00:19:00] So if you're a service provider, this is your retainers, this is your projects, this is your kind of bread and butter kind of work.
And generally this sort of income tends to come in within around 30 days. If you are a product company or you're an e-commerce provider, this is your sort of day-to-day sales. These are the orders that are going out day after day, week after week, and the money is kind of coming in as your bread and butter.
Then you might also be looking for some slow money in your business. This is the type of revenue stream that takes a long time to land, but generally when it comes in, it's a really great boost because it's something out of the ordinary. So it might be an export contract. It might be a big tender. It could be doing some work for a local council when you usually work for small businesses.
So the money will probably take longer to negotiate and longer to come into your bank account. Then your medium [00:20:00] timeframe money, but it needs to be at a higher amount than your kind of day-to-day income because you're taking a bigger risk in going after that revenue. So when we have money that is dropping into our bank, fast, medium, and slow, it means that we're not relying on the same revenue all of the time.
It might also be worth considering, am I trying to bring all of our revenue in from one target market or one ideal client type and depending on your business, 'cause for some businesses, I really love the simplicity of just having one ideal client type. But if your business is getting more complex, it might be worth considering.
Are there revenue streams that I could be tapping into here That where our product or service is relevant to this audience, but they're not part of our main audience? So it might be that you are protecting yourself from the risk of only selling to one industry or [00:21:00] client type. Especially when things like COVID-19 just come up out of nowhere and they affect whole industries.
So thinking about how can I get money to be dropping into my bank account more often from different sources and not, you know, if all of your income drops on the 30th of the month, that makes it really difficult. The other days of the month when you have bills coming in. So thinking about how you can get your.
Income to be dropping into your bank account all through the months is a really great way to improve your cash flow. So just rounding out this episode, poor cash flow is one of the biggest causes of small business closure. Poor cash flow is where essentially you have more money going out than coming in over a short or long period of time, and it's bloody stressful.
So here's five ways that you can improve your cashflow. Number one, [00:22:00] start paying more attention. Number two, look at your pricing and increase it. Number three, look at how you are managing your money and put a system in place to make that easier and more streamlined and aligned. Number four. Make sure the amount that you are growing as a business is something that your cashflow can keep up with.
And if not, perhaps consider slowing your growth so that your systems and your cashflow can grow with you rather than putting strain on everything inside the business. And number five, think about how you can get money dropping into your business on multiple days of the month, fast, medium, and slow money, or looking at how money can come from.
Different industries or different ideal client types to help protect yourself if there is any kind of a downturn in one of those industries. I really hope this episode has been helpful. I want you to [00:23:00] have amazing cash flow. If this has felt really resonant for you and you want to work on your cash flow, I can help.
We can work together one-to-one in my signature program, or you can come and join Good Money Club, which is small group coaching where we learn about cashflow, money management, money mindset, making money, and a lot more. So yeah, get in touch with me via the link in the show notes if you wanna find out about working with me, and, uh, I'll see you in the next episode.
Outro
Thank you so much for listening right up to the end. I hope you enjoyed this episode of Money Secrets, where we talk about the money secrets of successful small business owners. If you enjoyed the episode, I'd love it if you subscribe to the podcast, but leave us a review or share this episode with one of your friends.
I hope you learned something. I hope you got a new perspective and I really hope you enjoyed the listening [00:24:00] experience.
