Five keys that will unlock the cash in your business
Weve all heard the saying cash is king, profit is sanity and turnover is vanity, but have you ever stopped to think about what this really means? Here, Grid Law founder David Walker explains how to achieve profitability by unlocking the cash in your business.
When I ask entrepreneurs about the most important attributes of a successful business, many of them will talk about the business being as profitable as possible.
Now, there’s no denying that profits are important, but as the saying goes, profits are only sanity. Profits are just a line on your accounts. A theoretical amount which is left over when (in simple terms) you subtract your expenses away from your revenues.
You can’t spend profits, you can only spend cash, and this is why cash is king. Unfortunately, many entrepreneurs completely overlook this and cash reserves are rarely, if ever mentioned.
When a business has available cash reserves, it can:
Re-pay debts to reduce its liabilities
Pay the owners a dividend so they can reap the rewards of all their hard work
When a business is in financial difficulties, changing the focus from generating profits to generating cash can be the deciding factor in whether or not it survives.
On the other hand, even profitable businesses can be forced to close if theyrun out of cash. Ive seen business owners completely bewildered about what went wrong because they thought everything was going well. They didnt keep an eye on their cash flow and had no idea that the end was in sight.
So, how can you unlock the cash in your business?
Many business owners think there are just two ways to increase the available cash in their business increase sales and decrease costs. But there are actually five keys to unlocking more cash in your business and these are what were going to look at now.
More sales equals more cash provided you’re selling at a profit and your clients pay (see more on this below), so increasing sales will lead to more cash in your business.
You can also increase prices so more cash is generated from each sale.
Most business are very good at increasing sales so this is where they focus their efforts. When sales are increasing you quickly see tangible results and the business has a buzz of excitement around it.
However, increasing sales, as effective as it is, shouldnt be looked at in isolation because sales and busyness? don’t always mean more cash.
When your business is making healthy profits, youll probably spend as much money as your business needs because it seems like it’s being put to good use.
But is it?
When you’re busy and the business is growing, it’s easy for it to become inefficient. You can lose track of your spending as different departments demand bigger budgets to keep pace with their rate of growth.
This is the time you should be keeping a close eye on costs because increasing overheads can soon drain your cash reserves. Then, you only need a slight down turn in trade to turn your cash flow from positive to negative.
Turbulent times are when most business owners think about cutting costs as a way of saving cash, but even during the good times running your business as lean as possible is a great way of increasing the amount of available cash.
Decrease your inventory or stocks
If you run a retail business, money is tied up in the stocks you have sat on your shelves or in your warehouse. So, you need to keep them as low as possible. However, you need to strike a balance because if you don’t have sufficient stocks you could miss out on sales if your products are unavailable.
Therefore, you need to look at your supply chain management. The quicker your suppliers can deliver, the less stock you need to hold.
If you run a service business this is obviously going to be more difficult, but you will still hold stocks of some items. For example, think about your office consumables. With suppliers offering next day delivery, there’s probably more money than you think sat in the stationery cupboard.
Increase your accounts payable
Accounts payable is the amount of money your business owes to its suppliers. Increasing the length of time you take to pay a supplier, increases the amount of cash that is available in your business so you can prioritise what you spend it on.
Now, Im not suggesting for one moment that you pay your suppliers late! What Im saying is that there are other ways to increase your accounts payable.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.