Essential Cashflow Tweak Every Business Must Know

I'm going to show you a business case study where making one simple change is going to be the difference between the business going completely out of business, going bankrupt, running out of cash, and making $367,000 in profit by the end of the year. Now, this has nothing to do with selling more items or marketing or any of that stuff. It's selling exactly the same number of items inside the business, but this change here is critical. And if you're not implementing this inside your business, it probably means you're struggling with cash flow more than you should be. So if you want to know what it is and how you go about implementing it inside your business, it's really, really straightforward and you're going to kick yourself when you find out what it is and it really is a game changer hopefully for your business. Stick around. Let's get on with the video. Okay, so meet Jill. Jill is in the business of making solar panels. Now, this equally applies to whether this is a service business or a product based business. The information I'm going to talk to applies equally. So, if you've got a service business, don't click away and say, "Hey, this doesn't apply to me. " It really does. Okay? I'm just giving an example here. I had to pick a business idea and I thought this was quite a simple one to go with, right? Let's not waste any more time. So, Jill has a solar panel business and she basically buys solar cells for $50 and she sells it for $100. Now, if you've got a service-based business, this could be the cost of hiring out people to do the service and the revenue that you're making from selling that service, right? So, exactly the same thing, right? I'm going to now just stick with solar panels, but you get the idea. So, if she sells her solar panels for $100 and it costs her $50 to buy the cells and put them together and so on and so forth, she's making $50 off each sale, right, as a sort of gross profit. So Jill sits down and she kind of makes a cash flow projection and she says, "This is how many units I'm going to be selling each month for the rest of this year. In January, I'm not going to sell any cuz I'm just starting out. " Let's assume she's starting out. In February, I'm going to sell 50 units. In March, 150 units. In April, 250, so on and so forth until she's selling 3,500 by the end of December. And it looks like an absolutely amazing hockey stick, doesn't it? Right. So, she sits there and dreams a little bit. Well, let's actually say that her projections are bang-on accurate. So, she sells exactly those items throughout each of the months, right? Okay. So, how would this look on a very, very simple income statement? So, let's actually follow this through a little bit more and see how much it's going to end up costing her. But, it will cost you. And we're going to keep things very, very simple. So, let's start working through this very, very quickly and very simply so we can get the idea of what's going on. If she's going to sell 50 units in February, basically 50 times $100 and that makes it the $5,000. And if it's going to cost her $50 to make, so it's 50 units time $50, that's $2,500 in February. And that's essentially every item that you see here for each month. It's the number of units for that month multiplied by the cost of sales and revenue and so on and so forth. You get it. Okay? Right? So we get that left over in terms of gross profit. And then let's assume that it's just going to cost her $1,000 to run the business and pay taxes. We're going to keep things very, very simple here because this is not the point that I'm trying to get to. And I want to get to the point very, very quickly. Okay, so this is the net profit that we have after it. And at the end of the day, when all is said and done and she kind of adds up the,500 plus the 6,500, she's left up with 8,000. 8,000 plus the 11,500, she's left with 19,000. And you're basically adding each month's net profit together to see how much is her total profit by June, for example. Right? So, that's all good and well, but things don't work like that in real life, do they? Let's actually start looking at her cash flow projection. So, initially, what she's going to have to do is go out and buy these panels. So, when she actually gets paid, she gets paid 30 days later. She gets a month delayed. So, she sends out an invoice and her customers actually pay her 30 days later. And that's standard with a lot of businesses where they send out an invoice and say, "Please pay within 30 days. " However, when she has to manufacture the items, she kind of walks into the supplier, buys all the equipment that she needs, she pays for it a month ahead so that she can take it and manufacture it and put it all together and then sort of ship it out to the customer, right? So, this is going to be her paying for the items and the raw materials or whether you're paying for contractors or whatever if it's a service, you're paying a month ahead. So, let's assume that in January she has $25,000 already in her bank account. That's what she starts with. So, she spends $2,500 because what she's going to ship in February is already an order. She has to buy that equipment. So, the panels, 50 units, and she buys them at $50 and that's $2,500. And she has her operating expenses, taxes, or whatever she has to pay, and she ends up with $21,500. In February, she installs the 50 units and she sends out the invoice and she's not going to get paid until 30 days later, which is in March. But she

now knows that she's getting orders for 150 units in March. So, she needs to go and buy some more panels in February and she pays 7,500 because it's 50 time 150 units. $50 for the panels times 150 units. That's 7,500. And she goes and pays for that in February. And you can begin to get the idea here of what's happening. So everything that she's kind of buying is happening now. And when she's selling, she's selling with terms of 30 days on pay on invoice. Now her first $5,000 that she would have projected to come in February is now coming in March. And she's already paying for the items and the units that she needs to manufacture for her orders for April and so on and so forth. And you can begin to see that by April she's already run out of cash and by May she's gone to $5,000. And if we project out beyond that she's going to get to $19,000 or so. So you can begin to see that even though she is actually selling exactly the same units, she's run out of cash because she hasn't been able to manage her cash in an efficient manner. Okay. So what could Jill have done differently? Well, before we have a look at a couple of options, let's just work through the rest of the year on how her projections would have actually really worked out in real life. Now, if we would carry on with her cash projections, if we just look at the forecast of her amazing hockey stick revenue, she would have been making like pretty much $554,000 by the end of December and $743,000 in January. But if you kind of work through the cash flow, you'll begin to see that she runs out of cash. she gets to 19,000 in September, but then after that she will be able to recoup that amount. Now, I know $19,000 sounds like a lot of money, and it is. However, in the bigger scheme of things, when you look at her projections, it really isn't that much money. So, what could she have done? So, let's have a look at option number one. Option number one, which is what most people will probably jump to straight away and say, "Well, first of all, she could borrow some more money and she could like, you know, manage the cash flow cuz if $19,000 is all of her sort of deficit, if she borrows 20,000, then she's okay. Okay, so let's try with that. Let's borrow an extra 20k at the beginning. So now instead of having 25,000, she's got $45,000 at the beginning. So let's follow that through. " And you'll begin to see that as planned, as expected, in September, instead of being 19,000 in the red, she's now 1,000 positive, right? Because she had an extra $20,000 and she doesn't run out and the business does well. So, this is a viable option. So, do you always have to borrow money? Well, no, you don't money. There are times when borrowing money is useful and is viable. And we talk about this when we go through our firest starter program for example where we help business owners really scale their business and we begin to look at ways where people could manage their cash in a much better way. But this is not the only reason and the one that we're going to talk about is actually much simpler. But let's have a look at option two. Option two is actually that she could have sold less panels. panels because remember she had to buy more panels up front. And the problem that she had was that she was spending way too much on the panels and she was running out of money. So if she'd sell less panels, ironically, she would actually end up doing better. So instead of this projection of units sold, let's have this. So in July, for example, we'll go down by 50 units and in August October we'll go down by 400 units and so on and so forth. And if you actually look at the projections now, you end up managing your money in a way where you know exactly how much is going out and in at the right time. And this is why it is critical to make sure that you are projecting your cash flow and understanding how much is going out and how much is going in. And it makes all the difference. And you can see in this option actually ironically too much success was her downfall because if she would have sold less units, she would have actually stayed in business. Wait, what? And also in this case, it's actually better off than borrowing the 20 20k because she ends up with more money at the end of the year and she ends up with even more money in uh September, which is instead of it being $1,000 where we had her borrow money, she's now $13,500 in September. So, you can begin to see just by varying certain things, we can really make a difference in terms of how you're managing cash inside your business. Now, the last one, the best one of all is actually she could have negotiated better payment terms with the supplier. So, instead of paying just a month ahead, if you can just send me an invoice and I'll pay a month later, 30 days later, like she's doing with her own clients, right? So, now she is delaying the payment that she has. So, instead of having to pay for the 2500 in January, she's now paying it in February because she's paying it a month later. And she's still getting paid a month afterwards. So, she's not making her money in February. She's still making whatever she sold in February, she's still making and receiving that money in March. So, that's still a month delayed as well. So, it's not quite like her original

projections. However, what we've done is we've shifted her paying now a month later. And look at what this simple thing does. Here you go. I'm going to let that sink in for a second. It's better than borrowing money. It's better than both of the previous two options. So, we made just one simple thing by instead of paying on time where you go in and buy the items and pay for it, she's just negotiated with her supplier and said, "Can I pay you 30 days later? " And instead of running out of money and going out of business and being completely out of cash in September, she would have had $76,000 instead of being $19,000 in the red. And by January, she's got $367,000. So you can begin to see how critical managing money inside your business is. There are four levers for managing money, right? In terms of how money flows in and out of the business. So you either lower your costs, increase your prices, get paid as soon as possible, or delay payment as much as possible. And those are your four levers that you should be trying to always maneuver and making sure that you're tracking and projecting your cash flow. Now, I know I said this is such a dry subject. I know. But can you see how important it is? So please, if you're not doing this, I urge you, go back to your business, finances and sit there and project how the money is going to be moving in and out of your business. And not just how and how much, but specifically when is money coming in and when is money going out? Show me the money. And are you going to be able to manage it in a way? And if not, can you go and negotiate better terms? Now, I'm not suggesting for a second that you go and delay things without agreeing with your suppliers because when you build bad relationships with your suppliers or with your customers or with your clients, it tends to ruin your credibility and the trust and you're not going to be able to build a long-term relationship with them. So, make sure that you're negotiating and in the future when you are beginning to build trust with your suppliers. Now, these are suppliers whether these are service-based contractors or any of these kind of things. It doesn't matter, like I said before, whether it's service or product. As you build more and more trust, you are then going to be in a position where you can say, "Look, we're buying more of this stuff. We're giving you more money. Can we delay even more to 45 days to 60 days? Can we get a discount? Can we do all of these things? " And it will make a big difference if you start building that trust and building those relationships with your suppliers. And everybody negotiates. What else want to negotiate? If you've got enough power as you build your business and build that trust, everyone is willing to negotiate. Hope that's been useful for you.