[00:00:00] Fiona Johnston
It can come as a huge surprise and a massive kick in the teeth when you realize that your business will be so hungry for cash while it is growing. So when your business is experiencing the most growth is when you are most likely to run out of money, and it's so counterintuitive. I see this affecting really great businesses all the time, and so let's talk through how this happens.
Money Secrets Intro
Are you a small business owner who'd love to be making more money while making positive change in the world? You're in the right place, friend. Hi, I'm Fi Johnston, a chartered accountant and money coach obsessed with small business. In The Money Secrets podcast, I share strategies that you can use to make more money without working harder. You'll hear successful small business owners share what they've learned about money and business, and I'll help you to think differently and shift your [00:01:00] perspectives about money so you can grow your business and your impact. My mission is to get more money into the hands of good business owners like you.
Acknowledgement of Country
This podcast episode was recorded on the lands of the Wurundjeri people of the Kulin 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 ceded.
This always was and always will be Aboriginal and Torres Strait Islander land.
Fi
So let's talk about these hungry cash eating businesses. So especially if you are a product business, you always need to pay money out before you get money back in. So let's imagine that you do, you know, you sell, um, [00:02:00] sunglasses, and they need to be imported from Italy. So you need to pay for those sunglasses probably six, nine, 12 months before you are likely to see $1 of return, and this is why your business needs more money the bigger you are growing.
Because your first order for sunglasses might be for $5,000, and then you might go and sell those sunglasses. But because you're growing and you can see that the demand for your sunglasses is growing, your second order is gonna be for $10,000. But finding that $10,000 from the revenue that you've made for the stock that you've already sold can be really difficult.
And let's say you somehow find the money for that next order, the next order is even gonna be bigger. So the [00:03:00] next order might be for $20,000 and then $30,000 and then $100,000. And so doing these big orders is really exciting, but it's also putting your business into this really precarious cash flow position.
And the faster that you are growing, and the faster that your sales and your revenue are growing, the more likely you are to get into this cash flow problem where your business is just so hungry for cash, and it feels like you will never be able to give it enough money to keep it satisfied. So here are some of the things that you can do about that, and I'm gonna talk about service businesses after I explore product-based businesses.
So one of the things that we need to do when your business is growing is we need to make sure that your prices are actually high enough. Now, I know that you are probably sick of me talking about pricing, [00:04:00] but this is how we are able to afford the next shipment. So you need to be making enough margin on your products to be able to fund the next batch of products.
So if you are constantly finding that you cannot seem to be able to pay for that next order, I would say you need to look at your pricing very urgently because it's likely that you are not charging enough to be able to fund the expansion of your business. The next thing that we need to do when we are finding that we just cannot seem to feed the cash that our business wants from us is to look at the pace of our growth.
So are you actually growing faster than you can manage? If your business is growing more than about 20 to 25% per year, lots of years in a row, you are growing too fast. Now, if you are a very experienced business [00:05:00] owner or your product is very easy to purchase and kind of, uh, move through your business, you may be able to grow faster than that.
But if your business needs infrastructure and processes and people to pack the orders and get them out the door, you need to really think about, like, how are we going to fund a 20% growth in the amount of stock that we need to purchase six, nine, or 12 months before we can start selling it? Can we actually fund that level of growth within our business?
Sometimes getting a line of credit or a loan can be the right thing to do. But if you are going down that road, geez, I want you to know where you are going with your money I want you to actually have a proper plan in place about how you are gonna pay for that stock, and then what happens next. Like, what do the next six to 12 months look like in your business once that stock [00:06:00] has been paid for?
And by the way, that is something that I can absolutely help you with, either in Good Money Club, if you want me to show you how to do it yourself, or we can do it together one-on-one, either as a VIP day, or you can do a four-month one-on-one coaching program where we build all of this out together. So back to the diagnosing the kind of issue here.
So your business is growing. It's so hungry for cash. Every time you are trying to buy stock, it feels like this constant battle of trying to find enough money to fund these stock purchases. So what we've looked at so far is making sure that your prices are actually high enough to cover all of the costs that you have in your business and the cost of growth.
The next thing we're looking at is, are you growing too fast? Can you actually keep up with more than 20 or 20%, um, 20 or 25% growth per [00:07:00] year? In my experience, that is a really great number to try to stay under if you are trying to grow organically and safely and you don't want to accidentally drive your business into bankruptcy chasing a bigger amount of growth than that as a product business.
Unless you are a very experienced, um, product business owner, and in which case, go for it, my friend, but I really hope you know what you're doing. So the next thing is, okay, so we've identified that we might be growing a little bit too fast, so what do we do now? Well, what you can do is you can start to pull back on some of your growth levers.
So you might start just pulling back your meta ads a little. You might start pulling back on anything that is driving this sort of serious, huge amount of growth in your business, and you might try to come back to a, a more comfortable pace. It might be that you start doing your drops a little [00:08:00] less regularly.
It might be that you start just slowing things down a little. Putting your prices up may also have the impact of slowing down the amount of units that you sell, which could actually be a really good thing for your business overall because it means that you can make sure that you're getting a good margin and just slow your roll down a little bit.
The next thing that you might wanna consider is that if you are constantly having this issue of not having enough money to pay for stock, you might wanna consider adding a pre-order mix into your product range. So it might be that you decide to start doing all of your ranges as pre-order, or you might have certain ranges that you do as pre-order.
And what that does is it helps you to be able to fund the purchase of that batch of stock through money that has already been, you know, deposited by your [00:09:00] customers. It can also be a really great way of not over-ordering, and there's so many benefits to your customers, especially if they're looking for...
If they wanna buy from an ethical and sustainable business, they will love hearing about how doing a pre-order means that stock is not being wasted and ending, ending up in landfill. Doing a pre-order can also be a really great way of attracting eyeballs, especially for something that is really popular.
So if you have a particular dress style that always sells out, if you have a particular watch band that you know is super popular, what you can do is launch a pre-order, put heaps of effort into getting people into that pre-order kind of process, and then that batch of stock is gonna be much easier to purchase, and maybe the profits from that will allow you to build the next stock range that you need to do in your business.
These are [00:10:00] some of the reasons why your business gets super hungry for cash when you're growing. Because the more your revenue is growing, the bigger your stock purchases are going to be. And because you always pay for your stock long before your customers pay you, there's always gonna be a drag time between that growth that you can see coming on the horizon and that bigger amount of money that you need to put down for your stock.
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The more you learn about money, the more you [00:11:00] immerse yourself into the kind of strategies that work for small business owners. You are gonna see yourself feel calm with money, and that is gonna lead to you making more revenue, paying yourself more, and really thinking about money in a whole different way that feels good. Check out the link in the show notes to find out more about Good Money Club, and we would love to have you in there.
So now I'm gonna talk about what happens in a service-based business when you are growing. Now, if you are a sole trader or a company of one, you probably won't find that this issue happens for you because when your revenue is growing, if you have your prices right and you are not overspending on your expenses, then you will find that increasing your revenue also increases your cash flow, and it also increases your profitability.
So most sole [00:12:00] traders will not run into this problem if they are a single or solo freelancer or service provider. If you are a sole trader running a product business or manufacturing your own product or a maker, everything that I said before about product businesses applies to you as well. If you are a service-based business who is planning to grow a team or you have a team, you have exactly the same problem as product-based businesses, which is that you pay your staff before your customers pay you, right?
So this is why when your agency or your service-based business, maybe you have a law firm, maybe you have a creative agency, maybe you have a team of pest controllers working for you. When your revenue is growing, the cost of delivering your services starts to increase as well. And because we need to hire [00:13:00] staff before we can start making a revenue from them, there's that lag period between when you start to pay the wages and when your customers start to pay you.
So this is a really critical point for a service provider who is growing, that you might find yourself actually going backwards in terms of your cash flow for maybe that three to six-month period between when you hire a new person and when the money starts to kind of come in. And you can imagine that if you employ multiple people at the same time, the issue is potentially even bigger.
So what can we do about it? Okay, I'm so glad you asked. Okay. Here are some things that we can do if you are a service provider growing a team. The first thing that you can do is make sure your pricing is high enough. Because if your pricing is high enough, you should be able to be growing at least [00:14:00] some kind of a buffer in your business.
So it might be that you have a bank account put aside for where you accumulate your profit. It might be that you have a vault or whatever you call the place where you put money to cover future expenses. That's in an ideal world, but in the real world, that doesn't always happen. So let's say you're finding that you're ready to hire somebody, but you don't have that buffer yet.
So again, the first thing we wanna think about is, are my prices actually high enough to cover the inputs that go into delivering the service? Whether that's pest control, creative services, or law, you know, legal services, the kind of thinking is exactly the same. So the next thing that you might consider is, okay, there's a lot of demand for our service.
We have a lot of client leads coming in. Maybe your existing clients are doing a great [00:15:00] job of referring you to all of their friends, and so you have this constant source of leads coming in, but then you're really scared to kind of hire somebody because of that three to six-month lag thing. This is where building wait lists can be a great strategy.
So what do I mean by a wait list? So what I mean is that you still continue to take sales calls or discovery calls or to take booking requests through your website, however you do business But instead of telling that person that you can start with them right away, you say, "Hey, I loved talking with you about providing legal services to you, and we would love to work with you, and we will have a space available for you in eight weeks time."
Now, I know that seems counterintuitive to delay income coming into your business, but this can be a great way of building a full client list for your new staff [00:16:00] member to walk into. So let's say you know, okay, we need to hire one person to be able to take care of four clients. Therefore, we need to build a wait list of four clients before we can go and hire a new person.
Now, I know I'm making it sound super easy, as though you just, you know, pull these levers and you can hire somebody whenever you want to. But we still have to have an approach or a strategy where we are trying to think about what is the best way that will work for my business to do this. So yeah, we put a wait list process in place.
It could be as simple as a note in your phone where you have a list of the clients. It could be more complex than that. There could be a special email flow that goes to them. You might stay in touch with them and make them feel like they're already one of your clients while they're waiting. You certainly don't wanna lose the lead in [00:17:00] that time, so it might be that you include them at client events if you run them.
It might be that you give them a call once a month just to check in and see how things are going. So you definitely wanna keep that communication with them and keep them up to date with what's happening and letting them know that you are getting everything set up, so that when they start working with you, everything will be as good as it possibly can be.
So that can be a great way of feeling more confident about hiring a new person, so making sure that you actually have enough work or clients there to actually support that next person There's also another scenario which can actually feel more scary, which is when you are hiring a non-billable person into your team.
Shock horror. So often you might find yourself feeling really confident about hiring people [00:18:00] into your business if you're a service provider. Say you're, you provide legal services, you might have no fear about hiring lawyers that you know you can then charge out to your clients. But when it's time to hire a practice manager or a studio manager or an admin person, that might feel a little bit more scary because that person doesn't have a direct flow of revenue associated with them.
So how do we handle this? Look, we basically go about our process in a similar way. We need to make sure that your prices are high enough to accommodate the, this level of expenditure in your business. But the more important thing to think about is what are you going to be working on that you can't work on now because you have this new person coming into your business?
So thinking about, okay, if I'm gonna be paying this person $60,000 a year, [00:19:00] how do I make an extra 120,000 a year? What are the activities or the actions or the things that I could do to increase the demand for our services, to make sure our team is delivering, you know, incredible services? Whatever it is that you need to do to go and build more revenue for your business, that is how you are actually gonna pay for that non-billable person.
Think about that person not as an expense, but a lever to get you working on the most important activities in your business, which is generally bringing in revenue, business development, and creating a brand in the world for your business. I hope you found this episode interesting. Just to recap, the faster your business grows, the hungrier it will be for cash, and I've broken down why that happens, how to work through it, and if you have any other questions, I would bloody love to hear them.
You can send an email to [00:20:00] hello@peachbm.com.au anytime, and me or Kira will get back to you with an answer, and I will see you in the next episode.
Money Secrets 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, could 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 experience
