*transcript formatted from original video (watch video for full version)
Let’s talk about growth in cash flow. What does growth mean to you? For most entrepreneurs, it means top line revenue growth and more sales.
However, growth could simply mean an improvement in cash flow, more cash reserves, more cash flowing through the balance sheet, more cash in the bank.
In order to get there, we’ve seen that you have to have sound comprehensive financial assistance in place so you’re managing the income statement, improving gross profit, improving net income, and managing the balance sheet so there are no breaks on that net income as it flows through your company. Also managing assets and liabilities so you’re incurring decent cashflow from your current operations.
Only then is it time to start thinking about increasing revenue growth of your business from a volume standpoint.
And for that, there are lots of ideas on how to increase growth. Many of these are included in our Ultimate Cashflow guide.
In today’s pandemic economic crisis, it may be you need to pivot your business to a different product or service to diversify your revenue stream.
It may simply mean being better connected to your current customer base and increasing the sales volume from them instead of going outside and trying to get new customers.
It’s a lot more efficient to drive revenue from current customers than it is to spend money on marketing and advertising.
But what I want to make sure you understand is you need to have good financial systems and processes in place to measure profitability, measure gross profit, measure net income and measure cash flow.
Otherwise it’s not unheard of that you can grow your business into bankruptcy. We’ve seen it happen before and if you’ll just Google “growth of a business into bankruptcy”, you can see tons of examples out there.
I’ve seen many small businesses get into trouble with a huge contract with the biggest customer they’ve ever had before. It might account for 10 or 20% of the next 12 months and it’s an incredible opportunity to let slip through their fingers. However, without analyzing whether or not that huge influx of business will work with your current cashflow and systems, you are setting yourself up for failure.
You have to plan for the kind of pressure that’s going to put on your cash flow. You may need to ramp up personnel, ramp up inventory, ramp up equipment in order to take on that new revenue, that new volume. There’s cashflow required to do that.
There may also be new/different terms from that customer which are beyond your normal terms, where you’re waiting longer to get paid.
It’s part of the overall planning and projection process to recognize that situation and project out what that growth will actually do to your cash flow in the short term:in the next month, two months, six months. You may not actually see an increase in cash flow from that big new contract for six to 10 months down the road.
It all comes back to managing your cashflow so you’re not growing your business into bankruptcy.
If you’d like more ideas on managing and improving cash flow get our Ultimate Guide to Cashflow here.